Uh 


*Rary 


BEFORE    THE 


Jfnteratate  (Eflmmrro  OIommtfiHum 

I.  &  S.  DOCKET  555 

WESTERN  ADVANCE  RATE  CASE. 

IN  RE  ADVANCE  IN  RATES  IN  WESTERN  CLASSIFICATION 

TERRITORY. 

BRIEF  AND  ARGUMENT 

As  To 

FINANCIAL  CONDITION  OF  RAILROADS 

ON  BEHALF  OF 

THE  STATE  RAILROAD  AND  PUBLIC  SERVICE  COMMIS- 
SIONS OF  MINNESOTA,  NEBRASKA,  KANSAS,  SOUTH 
DAKOTA,  NORTH  DAKOTA,  OKLAHOMA,  LOUISIANA, 
IOWA,  ARIZONA,  ARKANSAS,  COLORADO,  IDAHO, 
MONTANA,  NEVADA,  NEW  MEXICO  AND  TRAFFIC 
BUREAU  OF  UTAH. 


CLIFFORD  THORNE, 
W.  M.  BARROW, 
H.  T.  CLARKE,  JR., 
P.  W.  DOUGHERTY, 
A.  J.  EDGERTON, 
C.  E.  ELMQUIST, 
A.  E.  HELM, 
J.  H.  HENDERSON, 
G.  A.  HENSHAW, 
F.  A.  JONES, 
WILLIS  E.  REED, 
W.  H.   STUTSMAN, 
OLIVER   E.    SWEKT, 


THE  UNIVERSITY 
OF  ILLINOIS 
LIBRARY 


335* 
UU3W 


"^Iw  **%*.       * 


TOPICAL  INDEX. 

PRELIMINARY  STATEMENT 1 

THE  ISSUES  6 

THE  EVIDENCE   13 

Differences — East  and  West 13 

Freight  Rates 13 

Operating  Ratios 16 

Horizontal  Increase  in  the  East 20 

Railroads  in  the  East 20 

Weak   Sisters   versus   Representative   Rail- 
roads    21 

The  Emergency  in  the  East 23 

1914  Lowest  Net  Revenue  in  East  Since  1908  25 
1914  Highest  Net  Revenue  in  West,  Save  1913  25 

European  War 25 

Inadequate  Maintenance  in  East 29 

Adequate  Maintenance  in  West 30 

Selected  List  of  Railroads 30 

System  Figures  versus  Subsidiary  Lines ....  31 

Territory  and  Railroads  Involved 31 

Mr.  Wettling's  List  of  Railroads  has  all  the 
essentials  of  a  sleeted  list,  and  cannot  be 
accepted  either  as  covering  the  situation 
as  a  whole,  or  as  containing  the  Repre- 
sentative Railroads  serving  the  territory 

involved 40 

We  find  the  railroads  specifically  named  in 
the  Suspension  Order  of  the  Commission 
in  this  case  to  fairly  represent  the  terri- 
tory sought  to  be  covered 49 

Discussion  of  Groupings 51    ^ 


353802 


ii 

Northwestern  Group 54 

Southwestern  Group 57 

Justification  for  division  of  the  Southwestern 

and  Northwestern  Groups 60 

Conditions  in  the  Southwest 65 

Amount  Involved 68 

Cost  of  Railway  Supplies 72 

Labor  Charges 75 

Return  on  New  Capital 80 

Reductions  and  Advances 82 

ANALYSIS  MADE  BY  MR.  POWELL  OF  REPRESENTATIVE 
RAILROADS  INCLUDED  IN  MR.  WETTLING's  LIST  AFTER 
PLACING  PERIODS  ON  SUBSTANTIALLY  THE  SAME 
BASIS 85 

1914  a  Year  of  Depression 89 

Excessive  Depreciation  Charges 93 

Burlington  Railroad 94 

Atchison,  Topeka  &  Santa  Fe 99 

In  actual  practice,  and  in  the  face  of  Theories, 
we  find  that  the  adequacy,  or  inadequacy, 
of  the  depreciation  charges  for  a  given  rail- 
road depend  upon  the  amounts  charged  to 
repairs 101 

THE  ARGUMENT 102 

Railroad  companies  that  are  honestly  and  intelli- 
gently constructed,  financed  and  managed,  are 
entitled  to  a  reasonable  return  on  their  prop- 
erty over  and  above  all  legitimate  operating 
expenses;  and  their  securities  should  be  at- 
tractive investments.  Justice  entitles  them  to 
this,  and  the  interests  of  the  public  demand  it. 

Elementary  Principles 102 

Periodical  rise  and  fall  in  prosperity  of  any 

business  102 

Panics 102 

New  Construction 103 

Changes  in  Accounting  Rules 103 


iii 

Changes  in  Maintenance  Standards 103 

Book  Value  104 

Weak  Property  not  Correct  Standard 104 

Subsidiary  Lines  not  Standard 105,  106 

Mismanagement 105 

Capitalizing  Permanent  Improvements  Built 

Out  of  Earnings 105,  110 

Representative  Railroads Ill 

The  Basis  for  Testing  the  Adequacy  of  Revenues .  114 

Different  Tests 117 

Railroad  Test:  Property  Investment 118 

Lane  Test 123 

Railroad  Securities  Commission  Test . . .  123 

Prouty  Test 123 

Supreme  Court  Test 123 

I.  WESTERN     RAILROADS    HAVE    ADEQUATE     FUNDS     WITH 

WHICH  TO  MAINTAIN  THEIR  PROPERTIES 125 

II.  THE  SECURITIES  OF  REPRESENTATIVE  WESTERN  RAIL- 

ROADS ARE  MORE  ATTRACTIVE  TO  THE  INVESTING 
PURLIC  THAN  THOSE  OF  COMPANIES  ENGAGED  IN 
ANY  OTHER  LINE  OF  INDUSTRY  IN  THE  UNITED 
STATES 128 

Railway  Credit 130 

CARRIERS '  EVIDENCE  ON   CREDIT — 

Differences  in  Eastern  and  Western  Case 131 

Festus  J.  Wade 131 

Mr.  Schaff  136 

Mr.  Felton  140 

J.  W.  Lusk 142 

Wettling  on  Credit 144 

Ignorance  as  to  Financial  Needs  of  Carriers .  145 

Burlington   145 

North  Western  146 

Milwaukee 147 

Union  Pacific 147 

Northern  Pacific 147 

Great  Northern 148 


It 

Great  Western 148 

Southwestern  Group  Territory 149 

Chicago,  Rock  Island  &  Pacific 149 

Margin  between  Stock  Rate  and  Bond  Rate 150 

shippers'  evidence  on  credit 151 

Methods  of  Analyzing 151 

Contrary  to  the  testimony  of  Mr.  Wade  the 
increase  in  the  yield  on  St.  Louis  bonds 

since  1900  has  been  25% 155 

The  decline  in  the  price  of  these  railroad 
bonds  has  been  at  a  less  rate  than  the  de- 
cline in  the  price  on  government  bonds,  or 
those  of  the  twenty  largest  cities  in  the 

United  States   156 

Comparison  of  the  average  yield  on  the  bonds 
of  railroad  companies  in  the  Northwestern, 
Southwestern,  and  Western  and  South- 
western Groups  combined  with  the  pure 

money  rate 157 

Are  the  Securities  of  Western  Railroads  Attrac- 
tive to  Investors  ? 161 

Yields  on  New  Issues  of  Securities 167 

Conclusion  as  to  New  Issues 172 

Short  Term  Obligations    172 

Yields  on  Bonds  of  Southwestern  Roads 174 

Stock  Prices   177 

Comparison  of  Actual  and  Relative  Prices  of 
Railroad  Stocks  with  Those  of  Industrials .  178 
Judgment  of  the  Investor 181 

III.       THE   NET  REVENUES    OF    THESE    CARRIERS  ARE  ADE- 
QUATE,  AS   PROVED   IN    THIS   CASE,   AND    JUDGED   BY 
THE  STANDARDS  WHICH  HAVE  BEEN  ESTABLISHED  IN 
THE  PAST  BY   THE    UNANIMOUS   ACTION   OF   THIS 
COMMISSION 183 

Tendencies  of  Earnings 183 

Return  on  Book  Value 185 

Return  on  Capital 188 


T 

Northwestern  Group 193 

Southwestern  Group 197 

Return  on  Value 199 

Chicago  &  Northwestern  Railway 202 

Freight  Revenue  and  Density 203 

Revenues  and  Expenses 204 

Rates  of  Dividends  and  Interest 205 

Return  on  Book  Value  and  Analysis  of  Same .  206 

Chicago,  Burlington  &  Quincy 212 

Rates  of  Dividends  and  Interest 214 

Revenues  and  Expenses 215 

Freight  Revenue  and  Density 216 

Credit 217 

Atchison,  Topeka  &  Santa  Fe 218 

Revenues  and  Expenses 219 

Rates  of  Dividends  and  Interest 220 

Exaggerated  Book  Value 220 

Enormous  Maintenance  Charges 220 

Chicago,  St.  Paul,  Minneapolis  &  Omaha 221 

Connection  with  Chicago  &  North  Western . .  222 

Chicago,  Great  Western 222 

Not  Representative 223 

Chicago,  Milwaukee  &  St.  Paul 224 

Increase  in  Property  Investment 225 

Changes  in  Accounts 227 

Minneapolis  &  St.  Louis 229 

INVESTORS  IN  WESTERN  RAILROAD  SECURITIES,  AS  A 
WHOLE,  HAVE  REEN  EARNING  ADEQUATE  RETURNS.  .231 

Returns  to  Investors  Earned  by  Railroads  in 
Different  Groups 235 

WHEN  CONSIDERING  THE  REASONABLENESS  OF  RATES, 
RATES,  IF  THE  CHIEF  ISSUE  IS  NOT  ONE  OF  DIS- 
CRIMINATION, BUT  CONCERNS  THE  AMOUNT  OF 
REVENUE,  THIS  QUESTION  IS  AT  THE  BASIS  OF  ALL 
COMPUTATIONS :  DO  THE  RATES  YIELD  A  REASONABLE 
RETURN  UPON  THE  PRESENT  VALUE  OF  THE  PROP- 
ERTY DEVOTED  TO  PUBLIC  SERVICE  f 244 


vi 

Supreme  Court  Basis 244 

What  is  a  Reasonable  Rate  of  Return? 245 

Present  Fair  Value 262 

Valuations  Made  by  States 265 

Capitalization    Compared    with    Valua- 
tions   268 

Wisconsin  Valuation  of  Railroads 268 

Minnesota  Valuation 269 

Nebraska  Valuation 270 

South  Dakota  Valuation 271 

Rate  of  Return  on  Jurgensen  's  Valuation 
of  Railroads  Involved 277 

Rate  of  Return  on  State  Valuation 278 

RECAPITULATION 279 


PROPOSED  FINDINGS. 

I.  That,  in  the  Western  District,  freight  rates  are 
much  higher,  and  operating  ratios  are  much  lower,  than 
in  any  other  territory. 

II.  That  western  railroads  have  adequate  funds  with 
which  to  maintain  their  properties. 

III.  That  the  respondent  companies  have  failed  to 
prove  that  their  credit  has  become  impaired,  or  that  their 
securities  are  unattractive  to  investors,  thereby  rendering 
them  unable  to  secure  adequate  funds  for  betterments  and 
improvements.  On  the  contrary,  the  record  shows  that 
their  new  construction  during  recent  years,  has  surpassed 
anything  in  their  former  history. 

IV.  That  the  respondents  have  failed  to  sustain  the 
burden  of  proof,  that  their  revenues  constitute  an  inade- 
quate return  upon  the  fair  value  of  their  properties. 


% 


PRELIMINARY  STATEMENT. 
THE  ISSUES. 

DISCUSSION  OF  EVIDENCE. 
ARGUMENT. 


PRELIMINARY  STATEMENT. 


Are  western  railroads  entitled  to  more  revenue 
through  advanced  freight  rates,  is  the  issue  presented 
in  this  case. 

Secondary  to  this  main  proposition  is  the  question 
whether  the  carriers  are  entitled  to  the  particular  ad- 
vances which  they  have  proposed  at  this  time. 

Railroading  and  agriculture  are  the  two  greatest  indus- 
tries in  the  United  States.  In  this  case,  the  railroad  in- 
dustry seeks  to  levy  an  additional  tax  upon  agriculture. 

We  have  witnessed  with  pride  the  marvelous  growth  of 
western  railroads.  Those  who  have  had  the  genius  and 
foresight  to  promote  these  enterprises,  have  generally 
had  the  genius,  likewise,  to  amass  fortunes  while  this 
development  has  been  in  progress. 

Railroads  have  played  an  important  role  in  the  indus- 
trial development  of  the  west.  Likewise,  the  farmers 
have  contributed  to  the  growth  and  prosperity  of  these 
carriers.  Neither  group  can  live  without  the  other. 
Both  need  money.  One  interest  must  consider  the  needs 
and  the  rights  of  the  other. 

The  Eastern  case  was  described  by  you,  in  the  decision, 
"as,  in  some  sense,  a  controversy  between  the  consuming 


2  PRELIMINARY  STATEMENT 

public  which  pays  the  rates,  and  the  investor  who  furn- 
ishes the  facilities  for  moving  the  freight."  (Five  Per 
Cent  Rate  Case,  31 1.  C.  C.,  351,  359.) 

The  present  proceeding  is  rather  between  the  producer 
and  the  railroad,  than  the  consumer  and  the  railroad.  It 
is  very  commonly  stated  that  the  consumer  pays  the 
freight.  Frequently,  however,  the  producer  pays  an  ad- 
vance, especially  on  the  raw  product,  while  the  consumer 
generally  pays  an  advance  on  the  finished  article.  It  was 
quite  conclusively  established  in  this  proceeding  that  the 
producers  of  live  stock  and  grain  are  the  parties  who  will 
pay  the  proposed  advances  on  those  products.  On  pack- 
ing house  products  and  broom  corn,  it  seemed  the  manu- 
facturer was  the  one  vitally  affected,  and  who  raised 
objection. 

The  railroads,  and  the  territory  involved,  are  substan- 
tially the  same  as  those  considered  in  the  two  cases 
decided  February  22,  1911,  entitled,  the  Western  Ad- 
vanced Rate  Case,  20  I.  C.  C,  307,  and  the  Railroad  Com- 
mission of  Texas  v.  A.,  T.  &  St.  Fe,  et  ah,  20  I.  C.  C,  463. 
For  convenience  we  shall  refer  to  the  latter  as  the  South- 
western Case  of  1910.  The  territory  corresponds  closely 
to  Western  Trunk  Line,  Trans-Missouri,  and  South- 
western Committee  Territories. 

May  21, 1914,  a  meeting  was  held  in  Chicago,  by  a  group 
of  men  representing  the  western  railroads.  There  it 
was  decided  to  undertake  to  increase  the  freight  tax  on 
western  shippers.  A  comprehensive  program  of  action 
was  agreed  upon.  The  particular  group  of  rates  in- 
volved in  this  proceeding  is  only  one  part  of  a  general 
movement  to  increase  their  revenues.  Various  methods 
were  unanimously  agreed  upon,  including:  specific  ad- 
vances on  special  commodities,  the  elimination  of  various 
privileges,  including  stoppage  in  transit  privilege,  the 
concentration  privilege  on  dairy  food  products,  and  a 
wholesale  advance  in  passenger  rates. 


PRELIMINARY  STATEMENT  3 

The  authorized  representatives  of  sixteen  states  de- 
cided to  ask  that  all  be  consolidated  in  one  case,  in  which 
the  adequacy  of  the  entire  revenues  of  each  of  these 
Avestern  railroads  should  be  thoroughly  investigated. 
The  Commission  joined  a  large  number  of  the  cases  into 
one  proceeding,  but  separated  the  passenger  rate  case, 
and  others,  from  this  part  of  the  freight  case. 

The  Commission  will  not  make  an  exhaustive  investi- 
gation of  the  financial  condition  of  these  carriers  in  each 
one  of  these  cases.  That  forces  the  issue  at  this  time, 
for  these  western  railroads. 

The  railroads  are  relying  chiefly  upon  what  they  call 
property  investment,  which  is  the  book  value  of  their 
property,  as  the  basis  for  their  claims ;  a  basis  which  this 
Commission  repudiated  seven  years  ago,  saying  that  no 
accountant  of  any  standing  would  accept  this  figure  for 
a  moment,  as  any  evidence  whatever  of  original  cost,  or 
present  value. 

There  are  certain  fundamental  differences  in  conditions 
between  the  west  and  the  east,  of  a  controlling  character. 

Western  rates  are  already  more  than  25%  higher  than 
eastern  rates.  The  western  railroads  make  no  claim  be- 
cause of  the  European  war,  and  its  effect  on  wages,  sup- 
plies, or  credit. 

The  railroads  have  held  out  to  the  public  the  claim  that 
they  were  unable  to  buy  the  necessary  supplies  for  main- 
taining their  properties ;  and  that,  consequently,  business 
generally  was  suffering  because  of  this  condition.  Dur- 
ing this  case,  however,  the  western  railroads  have  speci- 
fically abandoned  that  issue  by  statement  of  record  made 
by  the  leading  counsel  for  the  carriers. 

A  striking  contrast  between  the  Eastern  and  Western 
cases  is  that  in  the  Eastern  the  executive  officials  of 
strong,  representative  railroads,  handling  over  one-half 
the  traffic  in  the  whole  territory,  took  the  stand.    In  the 


4  PRELIMINARY  STATEMENT 

Western  they  selected  the  presidents  of  three  of  the  weak 
railroads,  to  go  on  the  stand  to  testify  as  to  their  financial 
needs.  This  course  of  action  we  believe  is  wrong.  A 
weak  line  cannot  be  accepted  as  a  standard  or  test  for  the 
reasonableness  of  rates. 

There  are  weak  sisters  in  all  lines  of  industry.  It  is  the 
successful  that  sets  the  pace  for  the  rest  of  the  world. 
The  adoption  of  a  different  doctrine  would  be  contrary 
to  that  condition  which  prevails  in  all  other  lines  of  busi- 
ness in  the  country.  It  would  be  setting  a  premium  upon 
inefficiency. 

Some  would  have  us  believe  that  because  this  Com- 
mission has  granted  general  advances  in  one  part  of  the 
United  States,  that  it  therefore  must  grant  these  advances 
proposed  by  the  western  railroads.  It  will  be  a  strange 
situation  when  it  develops  that  because  one  group  of  rail- 
roads serving  one  territory  is  entitled  to  an  advance, 
therefore  all  other  railroads  in  the  United  States  are  also 
entitled  to  an  advance;  because  certain  railroads  need 
more  money,  therefore,  all  other  railroads  need  more 
money.  Let  us  pause  and  carefully  weigh  the  meaning 
of  such  course  of  action.  What  would  it  indicate  ?  Such 
argument  furnishes  interesting  food  for  thought.  Has  it 
ever  happened  in  the  history  of  this  Commission,  that 
because  reductions  are  granted  in  some  cases,  for  some 
railroads,  in  some  portions  of  the  United  States,  that 
therefore,  ipso  facto,  reductions  have  been  granted  on 
every  other  railroad,  in  every  other  part  of  the  United 
States  where  people  have  asked  for  them!  Strange  will 
be  the  conditions  when  that  day  arrives.  Regulation  will 
have  outlived  its  usefulness. 

Every  case  must  depend  upon  the  circumstances  and 
conditions  surrounding  the  matters  at  stake.  That  is 
axiomatic.  In  1910  you  granted  advances  in  the  south- 
west and  denied  them  in  the  East  and  the  west.  The 
courts  may  permit  advances  in  Ohio,  or  West  Virginia,  or 


PRELIMINARY  STATEMENT  5 

North  Dakota,  and  at  the  same  time  decline  to  advance 
rates  in  Minnesota  and  Missouri.  The  water  works  in  Chi- 
cago, or  the  telephone  lines  in  Indiana,  may  be  entitled  to 
advances;  while  those  in  California  may  not  be  entitled 
to  increases.  The  level  of  rates,  coupled  with  the  density 
of  traffic,  produces  different  revenues.  You  are  now  deal- 
ing with  approximately  two-thirds  of  the  American  na- 
tion. There  may  be  some  portions  of  this  territory  where 
advances  are  justified,  and  other  portions  where  they 
are  not  justified.  We  will  present  to  you  the  facts  as  we 
find  them. 


THE  ISSUES. 


BURDEN  OP  PROOF. 

The  Act  of  Congress  of  June  18, 1910,  places  the  burden 
of  proof  upon  the  carriers  to  show  that  any  rate  increased 
after  January  1,  1910,  or  sought  to  be  increased  after  the 
passage  of  said  Act,  is  just  and  reasonable. 

This  Commission  in  the  Western  Advanced  Eate  Case 
of  1910  construed  the  law  just  the  way  it  reads.  There  is 
no  room  for  discussion.  The  burden  of  proof  concerns  not 
only  that  portion  of  the  new  rate  which  is  the  increase 
over  the  old  rate,  but  the  burden  of  proving  the  reason- 
ableness of  the  advanced  rate  as  an  entirety  rests  upon 
the  carrier. 

This  is  the  distinguishing  characteristic  between  the 
English  and  American  statutes  upon  this  subject.  This 
Commission  in  its  unanimous  opinion  of  1910  clearly 
recognized  that  distinction  we  have  referred  to,  in  the 
following  language : 

''It  is  urged  with  much  force  and  an  extensive 
citation  of  authority  that  the  purpose  of  this  provi- 
sion was  to  limit  the  investigation  of  the  Commission 
to  the  consideration  of  the  necessity  for  '  the  increase 
in  the  rate.'  The  purpose  of  Congress,  it  is  said, 
was  to  regard  all  rates  in  effect  on  January  1,  1910, 
as  the  maxima,  which  could  not  be  increased  until  it 
was  shown  that  there  was  reason  and  necessity  for 
the  specific  increase  made.  This  would  limit  our  in- 
vestigation as  to  all  rates  increased  since  that  time  to 
the  simple  question:  What  additional  expenses  have 
attached  to  the  movement  of  these  articles  which 
make  proper  an  increase  in  the  rate  ? 


THE  ISSUES  7 

1 '  Such  a  construction  of  the  statute  is  suggested  by 
decisions  of  the  English  courts  in  interpreting  the 
railway  and  canal  act  of  1894.  We  think,  however, 
it  is  clear  from  the  language  of  that  statute,  as  well 
as  its  history,  that  the  purpose  of  Congress  differed 
from  the  purpose  of  Parliament.  The  English  law 
was  based  on  a  legislative  conclusion  that  existing 
rates  were  already  sufficiently  high  and  should  not 
be  increased  excepting  as  transportation  costs  in- 
creased. Therefore  the  English  commission  was  to 
deal  with  the  increase  itself  in  the  rate  and  not  with 
the  increased  rate.  This  distinction  is  fundamental 
in  the  consideration  of  the  laws  of  the  two  Govern- 
ments. ' ' 

That  places  a  heavy  burden  upon  the  carrier;  but  it  is 
not  a  harder  task  than  would  otherwise  fall  upon  the 
shipper;  that  has,  in  fact,  rested  upon  the  shipper  in  the 
great  majority  of  cases  in  the  past.  The  task  of  sus- 
taining the  burden  in  a  great  controversy  like  this  must 
not  be  lightly  disregarded.  The  carrier  has  the  necessary 
facts,  or  the  facilities  to  secure  the  same,  in  his  possession. 
It  is  right  that  he  should  have  the  burden  of  proof;  and 
until  it  is  repealed,  or  the  courts  hold  it  unconstitutional, 
that  must  be  accepted  as  law.  The  issues  in  the  ordinary 
case  before  the  Commission  seldom  rest  upon  the  question 
of  revenues  as  a  whole.  With  only  a  few  exceptions,  prac- 
tically all  cases  that  have  come  before  you  have  turned 
upon  questions  of  discrimination.  This  is  not  true  of 
many  cases  which  have  been  determined  by  state  com- 
missions or  municipalities,  which  have  been  appealed  to 
the  Supreme  Court.  In  this  case  the  carriers  themselves 
have  made  the  issue:  inadequate  revenues  as  a  whole. 

This  action  carries  with  it  some  far-reaching  conse- 
quences. We  must  consider  the  adequacy  of  their  present 
revenues;  what  their  actual  profits  are  (this  carrying  with 
it  all  the  complicated  questions  of  accounting  and  what 
constitutes  profits) ;  whether  those  profits  are  reasonable 
or  not;  what  is  a  reasonable  profit,  and,  back  of  that,  what 


8  THE  ISSUES 

is  the  best  evidence  of  the  value  upon  which  they  are 
entitled  to  such  a  profit.  Many  questions  of  law  and 
public  policy  are  raised. 

Most  of  these  questions  have  been  discussed  at  length 
in  the  decisions  of  this  Commission,  and  the  Supreme 
Court. 

THE  OWNERS  OP  THE  RAILROADS. 

Who  are  the  owners  of  our  railroads?  Can  we  deal 
with  some  colossal  giant  of  finance  who  owns  one  or  sev- 
eral railroads  like  the  North  Western,  or  Milwaukee  f  Of 
course  that  is  an  absurdity.  We  are  forced  to  deal  with 
facts  as  they  are,  not  as  somebody  might  dream  them  to 
exist.  There  are  two  classes  of  people  who  own  the  rail- 
roads :    first,  bondholders,  and  second,  stockholders. 

There  are  three  distinct  groups  of  interests  involved  in 
this  controversy: 

1.  Holders  of  railroad  bonds; 

2.  Holders  of  railroad  stocks ;  and 

3.  The  public,  including  producers,  shippers  and  con- 
sumers. 

The  bondholders  are  chiefly  interested  in  maintaining 
the  integrity  of  railway  properties,  as  going  concerns. 
This  Commission  must  assume  that  the  rates  on  the 
funded  debt  of  these  companies  are  reasonable,  for  they 
are  contractual.  The  man  who  agrees  to  loan  his  money 
at  a  certain  per  cent  per  annum  cannot  come  in  here  and 
ask  for  more;  his  only  interest  here  is  to  see  that  the 
ability  of  his  company  to  meet  its  obligations  is  not 
jeopardized,  or  taken  away.  While  none  of  the  companies 
have  claimed  the  usual  interest  on  their  bonds,  yet  it  has 
been  strongly  urged  that  railway  securities  are  no  longer 
desirable  investments.  If  this  be  true,  then  there  is  some 
ground  for  alarm  on  the  part  of  the  bondholder.  He  is 
primarily  interested  in  seeing  that  the  property  is  well 


THE  ISSUES  9 

maintained,  and  that  the  credit  of  his  company  is  not 
impaired.  If  a  company's  bonds  are  no  longer  salable,  it 
necessarily  is  of  importance  to  the  man  who  has  bought 
some  of  those  bonds  in  the  past,  and  now  holds  them.  To 
the  bondholder,  the  chief  issues  in  this  case  concern  the 
credit  of  the  railway  companies.  If  they  can  no  longer 
sell  their  securities,  needed  improvements  cannot  be 
made,  and  the  property  will  soon  start  on  a  downward 
course,  thereby  threatening  his  security. 

The  owners  of  railroad  bonds  are  interested  in  securing 
a  high  rate  of  return  on  their  investment,  and  stability  in 
the  security.  So  far  as  the  first  proposition  is  concerned, 
any  advances  that  might  be  granted  in  the  existing  rates 
will  not  result  in  an  increase  of  one-tenth  of  one  per  cent 
in  the  interest  rate  on  outstanding  bonds.  No  one  has 
suggested  an  increase  in  the  interest  rate  on  the  bonds 
outstanding  in  the  hands  of  the  poor  widow,  whose  hus- 
band purchased  them  thirty  years  ago. 

As  to  the  future  owners  of  bonds,  one  of  the  principal 
arguments  urged  in  support  of  an  advance  in  freight 
rates  is,  that  it  will  serve  to  reduce  the  interest  rate  paid 
on  that  class  of  securities.  Consequently,  so  far  as  any 
possible  increase  in  the  rate  on  bonds  is  concerned,  that  is 
not  involved  in  this  case  to  the  slightest  extent.  The  sole 
interest  that  the  bondholder  has  in  this  case  is  the  pres- 
ervation of  the  stability  of  his  security.  If  the  record 
shows  the  carriers  *  property  is  deteriorating,  or  its  credit 
is  rapidly  declining,  that  threatens  the  security  of  out- 
standing bonds,  then  the  bondholder  is  vitally  involved. 
We  will  give  somewhat  elaborate  consideration  to  this 
phase  of  the  case. 

STOCKHOLDERS. 

The  second  group  of  people  that  are  concerned,  and 
have  transportation  for  sale,  are  the  stockholders.  The 
stockholder  is  the  chief  party  in  interest  in  this  proceed- 
ing, and  will  reap  the  largest  reward  from  any  advance 


10  THE  ISSUES 

granted.  The  railroad  is  the  seller  of  transportation.  The 
public  is  the  purchaser  of  transportation.  A  clash  of  in- 
terests exists  in  any  proposal  to  increase  freight  rates  for 
the  purpose  of  simply  increasing  the  profits  of  the  stock- 
holders. There  is  not  a  particle  of  dishonesty  upon  either 
side  of  that  question.  It  is  the  same  old  conflict  between 
the  purchaser  and  the  seller,  that  exists  in  the  barter  and 
sale  of  cabbages,  land,  buildings  and  jack-knives.  The 
only  difference  between  this  situation,  and  that  prevailing 
in  business  generally,  is  that  we  have  here,  in  one  indus- 
try, several  hundred  thousand  people,  all  compactly  or- 
ganized under  one  head — Mr.  C.  C.  Wright.  Competition 
is  a  forgotten  myth  of  former  days.  The  Sherman  Anti- 
Trust  Law  has  long  since  been  dead,  and  buried,  so  far 
as  our  railroads  are  concerned.  It  is  this  fact  which 
exists  in  no  other  industry,  that  compels  the  exhaustive, 
searching  investigation  that  should  be  given  in  a  pro- 
ceeding of  this  character. 

The  stockholder  is  concerned  about  both  the  mainte- 
nance and  the  credit  of  his  company.  The  ability  to 
borrow  money,  and  to  sell  stocks  and  bonds,  is  necessary 
in  order  to  keep  abreast  of  the  times,  to  hold  business,  and 
to  maintain  the  present  earning  power  of  the  property. 
Another  issue,  however,  is  of  equal  importance  to  the 
stockholder.  He  is  not  so  well  protected  as  the  bond- 
holder; and,  on  the  other  hand,  there  is  no  contractual 
limit,  ordinarily,  on  the  maximum  return  upon  his  invest- 
ment. Naturally  he  wants  to  earn  as  much  as  he  can.  The 
real  conflict  in  this  case  is  between  the  public  and  the 
stockholder. 

On  many  matters,  the  interests  of  the  railway  com- 
panies and  the  public  are  in  common.  On  the  chief  issues 
in  this  case,  however,  the  interests  of  the  stockholder,  and 
the  public,  are  diametrically  opposed  to  each  other.  The 
railroads  are  the  sellers  of  transportation,  we  are  the 
purchasers.    They  want  to  get  as  much  as  they  can  within 


THE  ISSUES  11 

reasonable  bounds,  and  we  want  to  secure  their  services 
as  cheaply  as  we  can,  without  doing  them  an  injustice,  or 
hindering  their  further  growth  and  development. 

The  carriers  urge  that  increased  expenses  have  re- 
duced the  rate  of  return  to  such  an  extent  as  to  injure 
their  credit,  so  that  they  cannot  secure  funds  necessary 
for  improvements  and  betterments  to  their  properties. 

A  railroad  company  secures  its  funds  in  just  two  ways : 

1.  Through  current  earnings ;  and 

2.  Through  issues  of  notes,  stocks  and  bonds. 

The  railroad  company  is  entitled  to  maintain  its  prop- 
erty out  of  current  earnings;  but  it  is  not  entitled  to 
demand  current  earnings  adequate  to  build  permanent 
improvements.  Such  betterments  must  be  built  by  the 
owner  of  the  railroad  and  not  by  the  public.  You  must 
not  make  the  public  build  the  railroad  for  somebody  else, 
and  then  pay  a  return  to  that  party  on  its  value.  This  is 
a  question  of  law  and  public  policy  that  is  at  issue  in 
this  case. 

The  method  by  which  a  company  secures  these  funds 
for  improvements  is  through  capital  issues.  We  are, 
therefore,  compelled  to  make  an  analysis  of  the  capitali- 
zation ;  to  consider  the  net  corporate  income,  the  funded 
debt,  the  relation  of  stock  to  debt,  and  all  other  essential 
phases  of  its  capitalization. 

It  is  proper  and  necessary  for  us  to  examine  the  prop- 
erty investment  and  the  net  operating  income ;  but  when 
a  company  says  it  cannot  secure  funds  for  certain  pur- 
poses that  are  legitimate  and  necessary,  and  makes  that 
its  chief  argument  before  this  Commission  and  before  this 
country,  in  support  of  its  claim  for  money,  it  behooves 
us  to  see  if  that  claim  is  true  or  is  not  true. 

If  a  company  claims  its  securities  are  no  longer  at- 


12  THE  ISSUES 

tractive  to  investors,  that  is  a  serious  charge;  but  we 
should  not  immediately  undertake  to  find  what  makes 
those  securities  unattractive,  and  enter  into  a 
labyrinthal  analysis  of  percentages  of  this  and  of  that. 
Our  first  task  should  be  to  find  out  whether  that  claim  is 
false  or  true. 

The  task  of  investigating  the  credit  of  these  railroads 
is  the  first  task  in  the  case.  It  is  not  difficult  to  find  out 
whether  their  securities  are  attractive  or  not. 

When  a  leading  banker  of  the  West  takes  the  stand, 
and  says  that  the  railroads  have  to  pay  50  to  75%  more 
than  industrial  companies,  generally,  have  to  pay  to 
secure  money,  that  proposition  can  be  tested  very  con- 
clusively. 

It  becomes  necessary  for  us  to  face  the  situation  clearly 
as  it  exists.  It  is  folly  for  us  to  deliberately  assume 
that  a  company's  credit  is  weakened,  just  because  that 
company  claims  it.  If  that  is  all  that  is  desired  of  a 
regulating  body  of  this  character,  it  is  folly  to  have  any 
hearings  whatever.  Let  the  carriers  say  they  need  more 
money,  and  then  give  it  to  them. 

The  first  task  to  perform  is  to  see  whether  their  credit 
is  impaired,  and  to  find  out  what  the  facts  are. 

Summarizing  the  various  important  phases  of  a  pro- 
ceeding of  this  character,  we  find  the  issues  to  center 
around  the  following  propositions : 

A.  Are  the  railroads  able  to  maintain  their  properties 
as  they  ought  to  be  maintained  ? 

B.  Are  railroad  securities  attractive  to  investors? 

C.  Are  those  who  own  our  railroads  receiving  a  just 
return,  upon  the  reasonable  fair  value  of  the  property 
entitled  to  such  return? 


DISCUSSION  OF  EVIDENCE. 


We  will  here  discuss  such  portions  of  the  evidence  as 
do  not  readily  fall  under  the  divisions  we  have  made  of 
the  argument. 

It  was  announced  by  the  Commission,  and  agreed  to  by 
counsel,  that  the  official  files  of  the  Commission  containing 
the  reports  of  the  carriers  to  the  Commission  and  to  their 
stockholders  may  be  referred  to  as  part  of  the  record  in 
the  case.    (tr.  14790-14791.) 

DIFFERENCES-EAST  AND  WEST. 


FREIGHT  RATES. 

Freight  rates  in  the  west  are  much  higher  than  they  are 
in  the  east.  This  is  evidenced  by  two  exhibits.  First, 
we  call  attention  to  the  accompanying  exhibit  introduced 
by  Witness  Chambers: 


14 


THE  EVIDENCE 


Eh 

— 

3s 


GO  ZZ 

o  K 

£i 

c;  := 


e 


! 

5 


sinrc 

uox  J»d 


b(U 
a)  9 

< 


sil!K 

uojq  jaa 
anuaAdH 


be- 
j  = 


smre 

dnudAdH 


tKU, 

as 


anre 

uoj;  jaj 
anuaAaa 


CI  »  JJ  S  t^  n  «  M  N  f  S 


HMM*0*HO 
OJOSCOMMNIMO 


^•■^ooooeoeoT^t-ia-^to 


<toits»5t»iaooo 

HOOMHMOOOta 
THtHrHtHrHNNT-l 


n  «  -o  ts  c  »  cc  ei  »  o  w 


T-lr-lT-lr-tiHWCvjT-t 


bC~ 

"  r 

<5 


CJ^OO-HOOt-eOOiOiCilA 


Ht"ON*HNOO 
©OOMCOCOCaNt- 

HrtrtrtHNNH 


>»  - 

-  o 


u  © 


IS  © 


£5 


.2S 


-I* 


2  *»  »  3 


50    tC    J) 


QM5^£ 


^00 


fe  ej  P 

s  §"2 

SOU 


"3      fl 

2/ a  ^^oq  a» 

©£  ©     "*  a 

•*£  t*  **  J4  in  ea 
00        oo  u  2  S 

lil'-Ii 
SllJil 

•1     ".     ,1 


as 

S  o 

IS 

a   » 

•  - 

-  CO 


•  ®  § 

©  eo  2 

CQ  S 

at    ©  •"> 

3  K 

a 
6 


S  9 

■<    ©  e8 


©  <-; 

®  «*© 

«J    aj  fa  °. 

ej   o  o  o 

W  M     " 

.H  w  o  a> 

■a 

I 


hn  as 


y 

u    * 

_©  ■ 

-  -  = 

"3    ©  O 

-    -    § 

111 

2  -Ho 


i 

> 
■ 

K 

60 

a 


«5«o 


3  o 


•3  2.3 

1*11 

9  so    O 

a) 
fa 


THE  EVIDENCE  15 

It  will  be  noticed  that  the  revenue  per  ton  mile  on 
freight  traffic  in  the  western  district  as  a  whole,  also  in 
the  northwestern  and  southwestern  territories,  is  from 
20%  to  60%  higher  than  in  Official  or  Central  Freight  As- 
sociation, or  southern  territories,  while  the  average  haul 
in  the  western  district  as  a  whole,  as  well  as  in  the  north- 
western and  southwestern  territories,  is  substantially- 
longer  than  in  the  eastern  or  southern  district.  This  fact, 
if  other  conditions  were  analogous,  would  justify  lower 
revenues  per  ton  mile  in  the  west  than  in  the  east  and 
south.  The  accuracy  of  the  figures  shown  in  this  exhibit 
was  not  questioned  by  any  party  to  the  case. 

For  the  year  1914,  the  average  revenue  per  ton  mile  in 
Official  Classification  Territory  was  6.64  mills,  in  Central 
Freight  Association  Territory  5.17  mills.  In  the  western 
district  as  a  whole  it  was  8.92  mills,  or  34%  higher  than 
in  Official  Classification  Territory,  and  56%  higher  than 
in  Central  Freight  Association  Territory. 

In  the  Northwestern  Territory  the  average  revenue 
per  ton  mile  was  8.12  mills,  or  22%  higher  than  in  Official 
Classification  Territory,  and  42%  higher  than  in  Central 
Freight  Association  Territory.  In  Southwestern  Terri- 
tory the  average  revenue  per  ton  mile  was  9.30  mills, 
which  was  40%  higher  than  in  Official  Classification  Ter- 
ritory and  63%  higher  than  in  Central  Freight  Associa- 
tion Territory. 

The  second  exhibit  in  support  of  the  proposition  we 
have  stated  is  Kirkland  No.  2.  This  exhibit  is  prepared 
along  precisely  the  same  lines  as  the  Morris  Exhibits  in- 
troduced in  the  Eastern  Case,  which  persuaded  the  Com- 
mission that  the  level  of  freight  rates  in  C.  F.  A.  Terri- 
tory was  lower  than  anywhere  else  in  the  country.  This 
compilation  prepared  by  Mr.  Kirkland  is  much  more 
thorough  and  exhaustive  than  Morris  even  attempted.  It 
proves  the  situation  just  as  effectively  and  conclusively 
as  Morris '  Exhibit,  only  more  so.  Further,  it  completely 
substantiates  the  showing  made  by  the  single  sheet  ex- 


16  THE  EVIDENCE 

hibit  presenting  average  revenues  per  ton   mile   in   the 
given  territories  which  we  have  described  above. 

It  has  been  conclusively  proven  beyond  a  question  of  a 
doubt  that  the  freight  rates  in  this  western  territory  are 
very  much  higher  than  in  Official  Territory  or  C.  F.  A. 
Territory — rates  which  the  Commission  has  of  late  had 
occasion  to  pass  upon. 

OPERATING  RATIOS,  EAST  AND  WEST. 

Different  policies  of  maintenance  and  of  new  construc- 
tion may  produce  different  operating  ratios  at  one  and 
the  same  time,  for  different  companies,  that  are  absolutely 
equally  prosperous. 

Again,  your  operating  ratio  may  increase,  and  your 
profits  may  increase  at  the  same  time.  In  other  words, 
your  expenses  may  increase  at  a  much  greater  rate  than 
your  earnings;  and  yet  your  net  earnings  will  increase 
at  the  same  time. 

A  concrete  example  best  proves  this.  Suppose  you  have 
a  property  earning  $1,000  gross,  with  an  operating  ex- 
pense of  $500.  Suppose  there  is  an  increase  of  80%  in 
your  expense  and  only  50%  in  your  gross.  In  that  case 
your  new  gross  will  be  $1,500,  and  your  new  expense  $900, 
leaving  a  net  of  $600,  instead  of  $500,  which  you  had  the 
previous  year.  In  this  case  your  operating  ratio  the  first 
year  was  50%,  and  the  second  60%.  But  your  net  reve- 
nues increased  20%  in  spite  of  an  increase  of  10  points  in 
your  operating  ratio. 

The  real  test  is  not  what  is  the  ratio  of  expenses  to  earn- 
ings; but  what  is  the  ratio  of  your  true  net  to  the  value 
of  that  property  upon  which  you  are  entitled  to  earn  a 
return. 

However,  our  friends,  the  railroads,  place  especial  reli- 
ance upon  operating  ratios.  For  their  benefit,  we  take 
pleasure  in  showing  a  comparison  of  operating  ratios  on 


THE  EVIDENCE 


17 


the  eastern  railroads  with  the  operating  ratios  on  west- 
ern railroads. 

COMPARISON  OF  OPERATING  RATIOS- 
WESTERN  WITH  EASTERN  TERRITORY. 


WESTERN  LINES 

EASTERN  LINES 

1914 

1914 

Northwestern  Group: 

Trunk  Line  Roads: 

C,  B.  &  Q 

67.01 
66.82 

74.90 
76.06 

Penn.  R.  R. 

C,  M.  &  St  P 

N.  Y.  C.  &  H.  R. 

C.  &  N.  W 

70.99 
61.66 
65.83 

73.92 
75.20 
72.83 

B.  &  O. 

G.  N 

Penn.  Co. 

M.,  St.  P.  &  S.  S.  M.. 

N.  Y.,  N.  H.  &  H. 

C,  St.  P.,  M.  &  0... 

70.21 

76.52 

L.  S.  &  M.  S. 

U.  P 

57.75 
60.50 
75.95 

80.77 
70.85 
82.32 

B.  &  M. 

N.  P 

Erie 

C.  G.  W 

N.  Y.  C.  &  St.  L. 

M.  &  St.  L 

71.63 

Representative  Lines 

in  Southwestern 

Group: 

A.,  T.  &  S.  F 

64.33 

Coal  Carrying  Roads: 

So.  Pac 

59.75 
64.35 

69.40 

St.  L.,  I.  M.  &  S 

Leh.  Val. 

D.  &  R.  G 

69.14 

74.77 

61.85 
64.97 

P.  &  L.  E. 

C,  R.  I.  &  P 

C.  R.  R.  of  N.  J. 

St.  L.  &  S.  F 

73.19 

66.30 

D.  &  H. 

76.33 

67.47 

P.  &  R. 

M.,  K.  &  T 

72.09 
81.80 

68.29 
68.42 

B.  &  L.  E. 

Hocking  Valley 

64.34 

D.  L.  &  W. 

C.  F.  A.  Lines: 

89.03 

C.  C.  C.  &  St.  L. 

78.87 

P.  C.  C.  &  St.  L. 

74.66 

C.  I.  &  L. 

78.56 

Vandalia 

83.43 

C.  &  E.  I. 

82.32 

L.  E.  &  W. 

79.91 

G.  R.  &  I. 

86.63 

C.  I.  &  S.                                  I  **] 

81.29 

Wabash 

65.49 

75.96 

35  Systems,  Eastern  Case 

67.15 

84.48 

C.  F.  A.— Group  III  Eastern  Cast 

71.50 

80.23 

C.  F.  A. — Group  I  Eastern  Case 

Authority:  I.  C.  C.  Preliminary  Abstract  of  Statistics  of  Common 
Carriers  for  the  year  ended  June  30,  1914. 

The  foregoing  table  makes  use  of  the  ordinary  operat- 
ing ratio  figure,  with  which  we  are  all  acquainted.  Mr. 
Wettling  produces  a  new  operating  ratio  by  adding  rents, 


18  THE  EVIDENCE 

taxes,  etc.  He  does  this  on  the  alleged  ground  of  making 
the  figures  comparable  with  previous  years.  But  it  will  be 
noticed  that,  at  the  same  time  he  fails  to  make  a  corre- 
sponding adjustment  of  the  depreciation  item  prior  to 
1908,  as  Mr.  Sturgis  was  fair  enough  to  do  in  1910. 

We  will  make  those  readjustments  in  our  previous 
table,  which  Mr.  Wettling  did,  placing  the  eastern  and 
western  lines  on  the  same  basis.  This  produces  the  fol- 
lowing results: 


THE  EVIDENCE 
COMPARISON  OF  OPERATING  RATIOS- 
WESTERN  WITH  EASTERN  TERRITORY. 


19 


WESTERN  LINES 

EASTERN  LINES 

1914 

1914 

Northwestern  Group: 

Trunk  Line  Roads: 

C,  B.  &  Q 

72.90 
71.87 

80.88 
82.12 

Penn.  R.  R. 

C,  M.  &  St.  P 

N.  Y.  C.  &  H.  R. 

C.  &  N.  W 

77.45 
68.65 

79.66 
81.64 

B.  &  O. 

G.  N 

Penn.  Co. 

M.,  St.  P.  &  S.  S.  M.. 

70.18 

81.25 

N.  Y.,  N.  H.  &  H. 

C,  St.  P.,  M.  &  0... 

78.07 

81.85 

L.  S.  &  M.  S. 

U.  P 

63.78 

87.95 

B.  &  M. 

N.  P 

66.22 

75.47 

Erie 

M.  &  St.  L 

79.63 
80.15 

89.81 

N.  Y.  C.  &  St.  L. 

C.  G.  W 

Representative  Lines 

in  Southwestern 

Group: 

Coal  Carrying  Roads: 

68.97 

74.93 

Leh.  Val. 

So.  Pac 

68.77 
71.48 

64.01 
71.92 

P.  &  L.  E. 

St.  L.,  I.  M.  &  S 

C.  R.  R.  of  N.  J. 

D.  &  R.  G 

73.54 
83.06 

69.72 
74.66 

D.  &  H. 

C,  R.  I.  &  P 

P.  &  R. 

St.  L.  &  S.  F 

75.68 

72.11 

B.  &  L.  E. 

T.  &  P 

82.82 

73.13 

Hocking  Valley 

M.,  K.  &  T 

78.84 
87.75 

71.98 

D.  L.  &  W. 

Mo.  Pac 

C.  F.  A.  Lines: 

98.53 

C.  C.  C.  &  St.  L. 

85.14 

P.  C.  C.  &  St.  L. 

86.92 

C.  I.  &  L. 

86.37 

Vandalia 

89.12 

C.  &  E.  I. 

92.39 

L.  E.  &  W. 

87.31 

G.  R.  &  I. 

82.98 

C.  I.  &  S. 

93.06 

Wabash 

71.48 

81.45 

35  Systems,  Eastern  Case 

93.04 

C.  F.  A. — Group  III  Eastern  Case 

87.58 

C.  F.  A. — Group  I  Eastern  Case 

Authority:  I.  C.  C.  Preliminary  Abstract  of  Statistics  of  Common 
Carriers  for  the  year  ended  June  30,  1914. 

Note:  The  above  ratios  were  computed  after  revising  the  Operat- 
ing Revenues  by  adding  Revenue  from  Outside  Operations  and  Rentals 
and  after  revising  the  Operating  Expenses  by  adding  Expenses  of  Out- 
side Operations,  Rentals  and  Taxes. 

It  will  be  noted  the  operating  ratio  in  the  Northwestern 
group  for  1914  was  71.48,  while  in  the  Eastern  territory 


20  THE  EVIDENCE 

for  the  35  systems  the  ratio  was  81.45,  for  C.  F.  A.  lines 
Group  III.,  93.04,  and  for  C.  F.  A.  lines  Group  L,  87.58. 

Using  the  operating  ratios  to  which  we  have  been  ac- 
customed in  the  past,  which  are  given  on  the  preceding 
table,  it  will  be  noted  that  for  the  Northwestern  group, 
the  operating  ratio  was  65.49  compared  with  the  ratio  of 
75.96  for  the  35  systems  in  the  Eastern  Case,  84.48  for 
C.  F.  A.  lines  Group  in,  and  80.23  for  C.  F.  A.  lines 
Group  I. 

HORIZONTAL.  INCREASE  IN  THE  EAST. 

While  there  was  a  general  uniform  advance  in  the  east 
except  for  short  hauls,  in  this  Western  case  the  carriers 
propose  innumerable  variations  in  the  advances,  ranging 
from  5%  to  100%.  Practically  the  entire  advance  is  cen- 
tered upon  a  dozen  commodities,  and  in  only  a  limited 
portion  of  the  territory. 

RAILROADS  IN  THE  EAST. 

The  railroads  in  the  east  were  constructed  at  a  much 
heavier  cost  to  the  carriers  by  reason  of  the  fact  that  they 
followed  population  instead  of  preceding  it.  They  con- 
nected cities  already  established  and  thriving.  In  the 
west,  the  railroads  very  largely  preceded  population  and 
civilization.  Much  of  the  right  of  way  has  cost  them 
practically  nothing.  The  growth  of  the  west,  ac- 
companying the  railroad  construction,  has  been 
phenomenal  in  character.  The  vast  extent  of  land  bon- 
uses, aggregating  millions  of  acres,  larger  than  the  Ger- 
man Empire — which  is  exclusive  of  the  enormous  gifts  of 
cities,  counties,  states  and  individuals — has  made  the  ac- 
tual investment  of  western  railway  companies  very  small 
compared  with  that  of  eastern  companies. 

The  commercial  development  of  the  east  has  passed  its 
zenith ;  the  center  of  manufactures  and  the  center  of  pop- 


THE  EVIDENCE  21 

illation  are  rapidly  approaching  the  western  district;  in 
other  words,  we  are  now  witnessing,  and  will  witness  dur- 
ing the  next  quarter  of  a  century,  a  continuous  growth 
in  the  west,  southwest  and  northwest,  far  surpassing  the 
commercial  development  of  the  east. 

WEAK  SISTERS  VERSUS  REPRESENTATIVE  RAILROADS. 

One  of  the  striking  contrasts  between  the  two  cases 
relates  to  the  character  of  the  testimony  offered.  In  the 
Eastern  case  the  presidents  of  the  representative  rail- 
roads took  the  stand  to  testify  as  to  their  financial  needs, 
including  such  companies  as  the  Pennsylvania,  Baltimore 
&  Ohio  and  New  York  Central,  three  railroads  which 
handle  over  40%  of  the  traffic  in  Official  Territory. 

In  the  Western  Advance  Eate  Case  of  1910,  the  chief 
executives  of  both  Western  and  Eastern  lines  testified  as 
to  their  financial  condition  and  need  of  additional  funds, 
and  as  to  their  alleged  inability  to  secure  the  same. 

In  the  present  Western  case,  the  only  railroad  official 
representing  any  of  the  Northwestern  group  of  railroads 
who  offered  any  testimony  whatever,  was  Mr.  Felton, 
President  of  the  Chicago  Great  Western  Eailroad,  com- 
monly recognized  as  one  of  the  weak  properties  in  the 
territory. 

In  the  Northwestern  group  of  railroads  the  great 
bulk  of  the  traffic  handled  is  carried  by  the  Bur- 
lington, the  North  Western,  the  Milwaukee,  the  Chicago, 
St.  Paul,  Minneapolis  &  Omaha,  the  Soo  Line,  the  Union 
Pacific,  the  Northern  Pacific  and  the  Great  Northern  Com- 
panies. No  man  took  the  stand  who  could  testify  that  any 
of  these  railway  companies  were  not  able  to  secure  all  the 
money  they  needed  for  betterments,  improvements  and  ex- 
tensions. No  man  took  the  stand  to  testify  that  these  com- 
panies were  in  a  good  condition  or  a  poor  condition,  finan- 
cially or  physically.  Mr.  Felton  gave  a  lot  of  glittering 
generalities  about  the  railroad  industry,  but  when  asked 


22  THE  EVIDENCE 

specific  questions  as  to  other  properties,  he  plead  igno- 
rance, and,  when  asked  specific  questions  as  to  his 
own  property,  he  admitted  that  it  was  not  an  average  or 
typical  property  in  that  territory ;  that  it  was  in  a  better 
condition  physically  and  financially  than  in  1910;  and 
that  the  Commission  found  it  not  entitled  to  any  advance 
in  1910.    (tr.  194.) 

In  the  Southwestern  Territory,  no  official  nor  any  per- 
son connected  with  the  financial  needs  of  the  carriers, 
such  as  the  Santa  Fe,  Southern  Pacific  and  St.  Louis  & 
Southwestern,  offered  any  evidence.  The  only  per- 
have  the  testimony  alone  of  Mr.  Wettling.  The  only  per- 
sons acquainted  with  the  financial  needs  of  any  other 
southwestern  railroad,  aside  from  those  we  have  named 
above,  were  Mr.  Bush  of  the  Missouri  Pacific,  Mr.  Schaff 
of  the  Missouri,  Kansas  &  Texas  and  Mr.  Lusk  of  the 
Frisco. 

J.  W.  Lusk,  one  of  the  receivers  of  the  Frisco  line,  made 
some  sweeping  statements  about  the  poor  conditions  of 
railroads.  His  published  statement  that  the  railroads 
"were  in  the  soup"  proved  to  be  founded  merely  upon  a 
general  impression,  and  was  not  based  upon  any  investi- 
gation of  his  own.  He  admitted  finally  that  his  knowl- 
edge was  restricted  to  the  Frisco,  sand  he  did  not  know 
anything  about  that  prior  to  December  5,  1913;  that  he 
had  never  investigated  the  financial  condition  of  the  rail- 
roads as  a  whole  in  this  territory;  that  he  did  not  know 
that  their  net  earnings  in  1913  were  greater  than  ever 
before  in  their  history ;  and  he  was  unable  to  name  what 
were  the  average  or  representative  roads  in  this  section, 
(tr.  589,  592.) 

The  testimony  of  the  other  two  gentlemen,  testifying 
as  to  the  M.,  K.  &  T.  and  the  Missouri  Pacific,  will  be  dis- 
cussed in  connection  with  the  territory  to  the  Southwest 
generally. 


THE  EVIDENCE 


THE  CARRIERS'  EXHIBITS. 


The  carriers'  exhibits  do  not  contain  the  data  as  to 
property  investment,  capitalization,  or  rate  of  return  on 
individual  companies.  Other  items  they  give  individual- 
ly, but  these  basic  factors  they  do  not. 

No  witness  took  the  stand  who  had  any  personal  knowl- 
edge as  to  the  operating  conditions  or  physical  needs  of 
any  of  the  carriers  in  the  case,  with  only  four  exceptions, 
the  Chicago  Great  Western,  M.,  K.  &  T.,  Missouri  Pacific 
and  Frisco. 

There  was  no  discussion  whatever  of  the  condition  of 
any  other  carrier  in  the  territory,  except  as  the  same  may 
be  shown  in  statistical  tables  compiled  from  records  on 
file  with  this  Commission. 

Mr.  Wettling  was  the  only  witness  offered  on  behalf 
of  the  other  companies  in  the  case.  He  was  unable  to 
state  whether  any  railroad  was  unable  to  secure 
all  the  money  that  it  needed.  He  disclaimed  any  knowl- 
edge of  their  conditions  or  needs,  financial  or  physical. 
He  did  not  know  whether  they  had  any  trouble  in  dispos- 
ing of  their  securities  for  needed  additions  and  better- 
ments. He  made  no  claim  that  they  did  not  have  ade- 
quate money  to  maintain  their  properties.  He  did  not 
know  the  rate  at  which  companies  in  any  other  line  of 
business  in  the  United  States  were  able  to  borrow  money. 
He  could  not  name  any  company  in  any  other  line  of  busi- 
ness that  had  any  better  line  of  credit  than  representa- 
tive lines  of  railroads  in  this  territory. 

THE  EMERGENCY  IN  THE  EAST. 

No  emergency  or  crisis  exists  among  our  Western  rail- 
roads as  our  Eastern  friends  sought  so  earnestly  to  prove 
concerning  their  properties.  No  attempt  was  even  made 
to  prove  an  emergency  of  that  character  demanding  im- 


24  THE  EVIDENCE 

mediate  relief.    In  doing  this,  the  railroads  in  the  west 
have  acted  wisely  and  properly,  for  there  is  no  crisis. 

Several  other  marked  differences  between  the  situa- 
tion in  the  east  and  the  west  are  disclosed  by  the  supple- 
mental opinion  in  the  Five  Per  Cent  Case. 

The  opinion  states  the  "facts  disclosed  and  occur- 
rences originating"  subsequent  to  the  date  of  the  orig- 
inal order,  and  which  facts  justified  a  change  in  the  orig- 
inal order,  ' '  as  presented  at  the  further  hearing  may  be 
summarized — first,  complete  returns  for  the  fiscal  year 
ending  June  30, 1914,  and  returns  for  succeeding  months ; 
second,  the  war  in  Europe." 

Let  us  now  consider  how  these  two  important  additions 
to  the  hearing  in  the  Eastern  case,  which  justified  a  con- 
clusion of  a  more  crucial  situation  existing  in  that  terri- 
tory, compared  with  the  record  as  now  completed  in  the 
Western  Advance  Rate  Case. 

At  the  time  of  the  original  hearing  you  only  had  before 
you  the  facts  as  to  July  and  August  of  the  fiscal  year 
1914.  At  the  time  of  the  rehearing,  you  had  complete 
reports  for  that  year,  and,  in  commenting  upon  those 
complete  reports,  you  find  "the  indication  is  that  some 
important  items  of  cost  have  been  relatively  inelastic,  or 
that  a  fall  in  gross  revenues  leaves  an  increasingly  nar- 
row margin  of  net  revenue." 

This  remarkable  conclusion  is  arrived  at  on  the  basis 
of  the  following  fact:  "While  the  gross  revenue  in  that 
year  declined  only  about  3.4%  the  net  revenues  shrank 
approximately  17.7%  as  against  the  previous  fiscal  year." 

If  that  shrinkage  was  due  to  the  manipulation  or  the 
adjustment  of  accounts,  and  independent  of  actual  rail- 
way operations  not  handled  to  prove  a  point,  then  the 
conclusion  reached  by  this  Commission  was  unfounded. 

Granted,  of  course,  that  the  Commission  is  correct, 
then  let  us  see  if  a  similar  situation  exists  in  the  west,  for 


THE  EVIDENCE  25 

if  it  does  not,  then  no  such  conclusion  as  therein  stated 
follows. 

1914  LOWEST  NET  REVENUE  SINCE  1908  IN  EAST. 

The  Commission  states  in  its  supplemental  opinion : 
"Not  since  1908  have  the  net  operating  revenues 
of  the  carriers  been  so  low  as  in  the  fiscal  year  end- 
ing June  30th,  last."     (32  I.  C.  C,  327.) 

1914  HIGHEST  NET  REVENUE,  SAVE  1913,  IN  WEST. 

Let  us  turn  to  the  Northwestern  Group  of  railroads. 
We  find  the  net  revenue  in  1914  to  be  $156,000,000.  With 
the  single  exception,  and  that  exception  1913,  the  net 
revenues  of  these  Western  railroads  were  greater  in  1914 
than  in  any  other  year  in  their  history. 

For  fear  the  railroads  will  urge  a  different  situation 
might  result  if  you  exclude  the  Union  Pacific,  Northern 
Pacific  and  Great  Northern,  we  call  attention  to  the  fact 
that  if  you  exclude  those  three  railroads,  the  net  revenue 
of  the  Northwestern  Group  amounted  to  $88,000,000  in 
1914,  which  also  (with  only  one  exception)  exceeded  any 
other  year  since  the  first  track  was  laid  west  of  the  Mis- 
sissippi river. 

Now  turning  to  the  Southwestern  Group,  we  find  the 
net  revenue  in  1914  to  be  $80,000,000,  which,  with  only 
two  exceptions,  1907  and  1913,  was  the  greatest  in  their 
history,  instead  of  being  the  lowest  of  any  year  since 
1908. 

EUROPEAN  WAR. 

As  to  the  second  basic  factor  presented  at  the  rehear- 
ing of  the  Five  Per  Cent  Case,  the  evidence  offered  at 
that  hearing  on  behalf  of  the  carriers  and  (quoting  again 
from  the  decision  of  the  Commission),  "on  behalf  of  the 
investment  bankers  who  appeared  at  the  hearing,  that  the 
war  in  Europe  has  created  a  condition  which  renders  the 
diminution  of  the  carriers'  net  income  a  menace  to  the 


26  THE  EVIDENCE 

prosperity  of  the  country;  that  the  war  has  placed  an 
added  strain  upon  the  credit  of  carriers;  that  rates  of 
interest  will  rise ;  that  a  large  volume  of  railroad  securi- 
ties is  held  abroad;  that  the  denial  of  the  increase  in 
freight  rates  would,  in  view  of  the  diminished  net  income, 
be  followed  by  a  dumping  of  foreign  securities  upon  the 
American  markets;  that  our  markets  would  not  be  able 
to  absorb  these  securities — at  least,  without  great  fall  in 
price ;  that  disaster  would  result  not  only  to  our  railroads, 
but  to_ insurance,  banking  and  industrial  concerns;  and 
that  for  these  and  other  reasons,  extending  far  beyond 
the  direct  needs  of  the  carriers  themselves,  we  should 
now  allow  the  proposed  increase  in  rates. ' '  Id.  32  I.  C. 
C.  329. 

As  a  result  of  this  evidence  which  seemed  to  be  per- 
suasive, the  Commission  reached  the  conclusion  as  fol- 
lows: 

"The  conflict  in  Europe  will  doubtless  create  an 
unusual  demand  upon  the  world's  loan  fund  of  free 
capital,  and  may  be  expected  to  check  the  flow  of  for- 
eign investment  funds  to  American  railroads.  It  ap- 
pears that  our  railroads  represent  the  bulk  of  Euro- 
pean investment  in  this  country.  The  rate  of  inter- 
est— the  hire  of  capital — has  risen  during  the  last 
decade,  and  may  rise  still  further. ' '  Id.  32  I.  C.  C. 
329. 

In  addition  to  this  the  Commission  also  found  as  fol- 
lows: 

"  Whatever  the  consequences  of  war  may  prove  to 
be,  we  must  recognize  the  fact  that  it  exists,  the  fact 
that  it  is  a  calamity  without  precedent,  and  the  fact 
that  by  it  the  commerce  of  the  world  has  been  dis- 
arranged and  thrown  into  confusion."  Id.  322, 1.  C. 
C,  330. 

In  striking  contrast  to  the  situation  as  portrayed  by 
the  bankers  and  railway  officials  who  testified  before  this 
body,  we  now  find  that  after  almost  a  year's  duration  of 
the  European  war,  money  is  a  drug  on  the  market ;  that 


THE  EVIDENCE  27 

interest  rates  are  lower  than  they  were  before  the  war; 
that  American  securities  have  not  been  dumped  on  Amer- 
ican markets,  and  as  a  culmination  of  it  all,  the  Western 
railroads  deliberately  abandoned  the  war  as  any  argu- 
ment or  justification  for  an  advance  in  freight  rates. 

This  remarkable  sequel  to  the  testimony  of  railway 
and  banking  officials  is  another  great  warning  to  this 
Commission  against  placing  too  much  confidence  in  the 
claims  of  these  gentlemen.  You  have  had  another  great 
warning.   You  mention  it  in  your  decision  when  you  state : 

"True,  the  representations  of  the  carriers  in  the 
1910  cases,  that  without  the  increases  then  sought 
their  credit  must  totally  vanish,  proved  strangely  at 
variance  with  their  subsequent  experience  in  the 
borrowing  of  many  hundreds  of  millions. "  32  I.  C. 
C,  329. 

However,  this  time  you  saw  fit  to  place  reliance  in  their 
claims,  for  your  very  next  sentence  was: 

"But  we  do  not  doubt  that  the  financial  problems 
of  the  carriers  have  been  made  much  more  acute  by 
reason  of  the  war,  and  if  we  are  to  set  rates  that  will 
afford  reasonable  remuneration  to  these  carriers,  we 
must  give  consideration  to  the  increased  hire  of  capi- 
tal as  well  as  to  other  increased  costs."  32  I.  C.  C, 
330. 

Now  listen  to  the  testimony  of  one  of  the  witnesses  put 
on  the  stand  in  the  Western  Advance  Kate  Case,  Mr.  Pel- 
ton,  the  president  of  the  Chicago  Great  Western  Rail- 
road: 

"Mr.  Thorne:  Mr.  Felton,  can  you  name  any  in- 
creases in  the  cost  of  supplies  of  a  substantial  char- 
acter since  the  beginning  of  the  European  war  af- 
fecting a  large  or  substantial  part  of  your  operating 
expenses? 

"Mr.  Felton:  Since  the  commencement  of  the 
European  war? 

"Mr.  Thorne:    Yes. 


28  THE  EVIDENCE 

"Mr.  Felton:  No,  sir,  I  don't  think  there  has  been 
any  increase. 

"Mr.  Thorne:  Any  increase  in  wages  of  a  sub- 
tial  character? 

"Mr.  Felton:  There  have  been  demands  enough; 
they  are  not  increased  yet.    (tr.  187.) 

Again,  as  to  the  war,  listen  to  Mr.  Felton's  statements 
that  remain  unqualified  by  any  other  witness : 

"Mr.  Thorne:  Can  you  borrow  money  as  cheap 
now  as  you  could  before  the  war  commenced? 

1  '  Mr.  Felton :  You  can  borrow  money  as  cheap  to- 
day for  short  terms,  I  should  say,  as  you  could  be- 
fore the  war  commenced,  but  since  the  war  we  have 
paid  as  high,  as  I  told  you,  as  7y2%  for  one  year 
money. 

"Mr.  Thorne:    What  month  was  that? 

"Mr.  Felton:    That  was  November. 

"Mr.  Thorne:  Can  you  name  any  other  company 
in  any  other  line  of  business  in  that  month  that  was 
able  to  borrow  at  a  cheaper  rate  than  you? 

"Mr.  Felton:  No,  I  think  not.  I  think  higher 
rates  than  that  were  paid.    (tr.  187.) 

After  the  first  war  scare  was  over  interest  rates  be- 
gan to  drop.  Money  in  Europe  or  money  that  was  ac- 
customed to  seek  the  markets  of  Europe  hunted  oppor- 
tunities for  investment  in  this  country. 

Mr.  Felton  readily  recalled  an  issue  of  securities  by  the 
North  Western  that  sold  at  a  rate  of  5%. 

Those  who  have  been  following  the  money  markets 
during  the  past  few  months  know  a  large  number  of  rail- 
road issues  that  have  been  made  at  less  than  5%. 

Finally,  in  the  cross-examination  of  Mr.  Hopkins,  Mr. 
Norton,  attorney  for  the  Santa  Fe,  objected  to  the  wit- 
ness referring  to  the  war,  saying:  "We  have  nothing 
on  here  as  to  the  war. ' ' 


THE  EVIDENCE  29 

Then  the  record  shows  the  following: 

"Mr.  Thome:  You  do  not  place  any  reliance  on 
the  war  as  justifying  your  advance  in  the  freight 
rates? 

"Mr.  Norton:  No,  we  have  no  figures  which  are 
affected  by  the  war ;  nobody  knew  June  30th,  except 
the  Kaiser  and  a  few  others,  that  there  was  going  to 
be  a  war."    (tr.  8139.) 

And  in  no  part  of  their  testimony  do  they  rest  upon 
the  European  war,  as  was  done  so  eloquently  and  forci- 
bly by  bankers,  railroad  presidents  and  railroad  attor- 
neys in  the  East. 

Consequently  we  are  relieved  in  the  discussion  of  this 
case  from  the  consideration  of  the  effects  of  the  Euro- 
pean war,  which  was  the  second  important  foundation  for 
the  supplemental  opinion  in  the  Eastern  Advance  Rate 
Case. 

INADEQUATE  MAINTENANCE  IN  EAST. 

Another  striking  difference  between  the  Eastern  and 
Western  situation  is  the  following  as  to  what  the  Com- 
mission found : 

"While  there  has  been  recently  an  enlarged  ex- 
penditure for  maintenance  of  equipment,  it  is  clear 
that  it  has  not  been  sufficient  to  restrict  to  proper 
limits  the  number  of  cars  and  locomotives  needing 
repairs."    32  1.  C.  C,  328. 

Statements  of  a  character  similar  to  this  have  been 
printed  in  advertisements  marked  "paid  advertise- 
ments," consisting  of  two  or  three  columns  in  several 
hundred  western  newspapers. 

There  are  such  things  as  admissions  and  statements 
made  by  parties  to  a  case  outside  of  the  actual  trial  being 
admissible  in  a  court  room.  They  are  frequently  the  most 
searching  and  telling  criteria  to  test  the  credibility  of  a 
witness ;  and  there  should  be  some  degree  of  accountabil- 
ity developed  as  to  these  railroads  and  their  agents,  that 


30  THE  EVIDENCE 

will  prevent  them  from  indulging  in  wholesale  false  ad- 
vertisements and  misrepresentations  before  the  public, 
without  there  being  any  responsibility  for  the  same  as- 
sumed later  before  this  tribunal.  In  making  reference  to 
this  subject  in  this  manner,  we  have  one  rather  respect- 
able precedent  for  such  action  in  20  I.  C.  C.  at  page  318. 

There  is  no  testimony  in  the  record  as  to  just  how 
much  does  constitute  a  reasonable  number  of  "bad  or- 
der' '  cars.  There  will  always  be  some  bad  order  cars. 
It  would  be  extravagant  to  maintain  the  whole  property 
up  to  "condition  new."  On  the  other  hand,  it  is  possi- 
ble, as  stated  by  the  Commission  in  the  Eastern  Case,  for 
the  carriers  to  fail  to  have  adequate  money  to  maintain 
their  properties  in  the  manner  in  which  they  should  be 
cared  for. 

ADEQUATE  MAINTENANCE  IN  WEST. 

Mr.  C.  C.  Wright,  chief  counsel  for  the  carriers  in  the 
West,  removed  this  issue  from  the  case  by  a  concession 
of  record  that  the  Western  railroads  were  able  to  main- 
tain their  properties  as  they  should  be.    (tr.  4663,  4664.) 

SELECTED  LIST  OF  RAILROADS. 

The  carriers  in  the  present  proceeding  claim  to  try  this 
case  on  the  basis  of  the  showing  as  to  conditions  as  a 
whole.  They  have  attempted  to  show  these  conditions 
in  the  entire  Western  territory,  and  second,  in  certain 
portions  of  that  territory  by  certain  groups  of  railroads. 

In  the  Eastern  Case  carriers  include  all  the  railroads 
serving  the  territory.  In  the  present  Western  Case  the 
exhibits  offered  by  the  railroads  constitute  a  selected  list 
of  companies,  leaving  out  four  strong  railroads,  as  well 
as  a  number  of  small  ones  that  were  specifically  named 
in  the  Commission's  Suspension  Order.  Two-thirds  of 
the  mileage  of  one  of  these  railroads  omitted  is  located 
in  Kansas  and  Nebraska.    Every  car  of  grain  and  every 


THE  EVIDENCE  31 

car  of  live  stock  moving  from  practically  every  town  lo- 
cated on  this  railroad  will  pay  the  advances  involved  in 
this  case. 

SYSTEM  FIGURES  VERSUS  SUBSIDIARY  LINES. 

In  the  Eastern  Case  the  railroads  used  system  figures. 
In  the  statistics  filed  in  this  case  by  the  carriers,  they 
omit  the  Southern  Pacific  and  include  in  lieu  thereof,  four 
of  five  subsidiaries,  most  of  which  made  splendid  deficits 
last  year. 

The  Southern  Pacific  is,  as  is  known,  one  of  the  great 
railroad  properties  of  the  country.  It  is  true  it  extends 
to  California;  but  it  is  also  true  that  the  Santa  Fe  ex- 
tends to  California,  and  they  include  the  Santa  Fe  in 
their  tabulation.  The  inclusion  of  a  part  of  the  strong 
lines  and  the  exclusion  of  others  that  are  equally  strong 
or  better,  simply  serve  to  reduce  the  general  or  consoli- 
dated average  upon  which  such  great  reliance  is  placed. 

TERRITORY  AND  RAILROADS  INVOLVED. 

There  are  two  methods  of  analyzing  the  adequacy  of 
railroads  in  any  given  territory.  One  is  to  select  a  few 
representative  companies  and  make  an  analysis  of  their 
financial  and  physical  conditions,  considering  them  rep- 
resentative of  the  territory  as  a  whole.  The  second 
method  is  to  get  a  composite  average  of  all  the  railroads 
serving  a  given  territory. 

The  first  method  named  is  the  one  adopted  by  the  Com- 
mission in  the  three  advanced  rate  cases  of  1910,  decided 
February  22,  1911.  The  second  method  is  the  one  pur- 
sued by  the  Eastern  railroads  in  the  advanced  rate  case 
last  year.  The  Eastern  carriers  were  careful  to  conscien- 
tiously include  all  of  the  railroad  systems  serving  the 
territory  that  had  a  substantial  proportion  of  their  mile- 
age in  the  territory. 


32  THE  EVIDENCE 

If  you  adopt  the  second  method,  the  consolidated  aver- 
age figure,  it  becomes  all-important  that  you  shall  fairly 
include  all  classes  of  railroads  that  serve  substantially 
the  territory  involved  and  that  do  not  have  the  bulk  of 
their  traffic  outside  of  that  territory. 

A  violation  of  that  fundamental  principle  can  produce 
all  sorts  of  distorted  results.  The  railroads  are  so  inter- 
laced throughout  different  parts  of  the  nation  that  if  in 
any  given  territory  you  exclude  strong  lines  having  fifty 
or  seventy-five  per  cent  of  their  mileage  in  a  territory, 
and  include  all  weak  lines  having  but  ten  or  fifteen  per 
cent  and  more  of  their  mileage  in  the  territory,  you  can 
produce  one  consolidated  average.  On  the  other  hand, 
if  you  include  all  strong  lines,  even  though  they  have  only 
ten  or  fifteen  per  cent  of  their  mileage  in  the  territory, 
and  exclude  many  of  the  weak  lines,  regardless  of  what 
proportion  of  their  mileage  and  traffic  is  in  the  territory 
involved,  you  can  produce  a  result  precisely  the  opposite 
from  the  above. 

A  selected  list  of  railroads  is  worse  than  useless  when 
you  are  trying  to  find  the  consolidated  average,  and  are 
going  to  place  any  weight  upon  that  figure  as  represen- 
tative of  the  adequacy  of  revenues  as  a  whole  in  a  given 
territory.  It  is  worse  than  useless ;  it  is  deceptive,  mis- 
leading, untrue  and  unjust. 

This  case  does  not  concern  only  the  rates  on  grain  and 
live  stock,  when  you  are  considering  the  adequacy  of  the 
revenues  as  a  whole.  In  that  event  we  are  analyzing  their 
financial  conditions,  the  crystallization  of  all  of  their  fi- 
nancial operations,  including  all  their  freight  traffic  and 
all  their  passenger  traffic.  "VVe  must  first  consider  the 
situation  as  a  whole  in  a  given  territory;  whether  it  is 
one  state  or  five  states  or  twenty  states,  the  all-important 
thing  is  to  take  all  of  the  railroads  that  can  fairly  be  con- 
sidered representative  and  serving  the  territory  involved. 
It  would  be  entirely  unfair  to  include  a  company  having 


THE  EVIDENCE  33 

only  ten  per  cent  of  its  mileage  in  a  given  territory  in  any 
total  which  purports  to  show  financial  conditions  as  a 
result  of  the  rates  in  that  section.  The  financial  condi- 
tion of  such  a  railroad  would  reflect  the  adequacy  of 
rates  in  the  territory  where  ninety  per  cent  of  the  mileage 
is  located. 

For  the  foregoing  reasons  we  must  give  very  careful 
thought  to  the  selection  of  the  railroads  that  go  into  any 
composite  figure.  We  should  either  take  a  few  typical 
properties,  or,  if  we  take  a  composite  average,  we 
must  include  all  the  strong  as  well  as  all  the  weak  ones. 
A  composite  average  derived  from  a  selected  list  does 
not  reflect  the  conditions  in  a  territory  as  a  whole  unless 
your  selected  list  is  truly  representative. 

In  his  opening  statement  Mr.  Wright  said  that  they 
would  offer  statistics  covering  the  territory  as  a  whole, 
as  distinguished  from  the  weak  lines  or  the  strong  lines. 
He  stated  they  had  pursued  this  policy  in  conformity  with 
the  suggestions  of  the  Commission  in  other  cases.  Now 
let  us  see  how  that  promise  has  been  carried  out. 

For  several  years  it  has  been  common  knowledge  that 
the  Western  railroads  were  going  to  ask  for  a  general 
advance  in  their  transportation  charges.  During  the  past 
two  years  this  movement  has  been  evidenced  by  many 
thousands  of  tariffs  filed  with  the  Interstate  Commerce 
Commission  proposing  increases  in  classification  ratings, 
rules,  regulations,  minimum  weights,  additional  charges 
for  various  services,  including  refrigeration,  stopping  in 
transit,  demurrage,  and  advances  in  specific  rates,  on 
scores  of  different  articles.  Finally  on  May  21,  1914,  at 
a  conference  held  in  Chicago,  the  plans  for  a  general 
movement  for  advanced  rates  were  formulated.  (Tom- 
linson,  tr.  11520.) 

The  carriers  who  were  respondents  in  this  case  filed 
over  1,000  tariffs  and  supplements  effective  December  1, 
1914,  and  shortly  thereafter  these  were  suspended  by  the 


34  THE  EVIDENCE 

Interstate  Commerce  Commission,  and  constitute  the 
basis  of  the  present  proceedings,  together  with  the  tariffs 
suspended  in  19  supplemental  orders. 

Subsequently  some  of  these  tariffs  were  separated  and 
given  other  numbers  on  the  docket  of  the  Commission. 
Other  large  and  important  advances  made  prior  to  that 
time,  have  also  been  suspended,  and  some  of  these  are 
still  pending  before  the  Commission,  presumably  waiting 
the  present  investigations  as  to  the  revenues  of  the  car- 
riers. Other  substantial  advances  by  these  same  car- 
riers, and  other  railroads  serving  the  same  territory, 
have  been  suspended  and  separate  cases  have  been  made 
of  them. 

It  is  fair  to  consider  this  whole  series  of  advances  as  a 
part  of  a  general  movement  to  increase  the  revenues  of 
Western  railroads.  There  will  be  no  serious  question  of 
that  fact  by  any  person.  These  general  advances  in 
freight  rates  were  followed  by  a  proposed  general  ad- 
vance in  passenger  rates,  throughout  the  same  territory, 
and  by  the  same  railroads. 

The  railroads  named  in  the  original  suspension  order 
of  the  Commission  were  41  in  number,  as  follows: 

1.  Atchison,  Topeka  &  Santa  Fe  Eailway  Co. 

2.  The  Chicago  &  Alton  Railroad  Company. 

3.  Chicago  &  Eastern  Illinois  Railroad. 

4.  Chicago  &  North  Western  Railway  Company. 

5.  Chicago,  Burlington  &  Quincy  Railroad  Co. 

6.  Chicago,  Great  Western  Railroad  Co. 

7.  Chicago,  Milwaukee  &  St.  Paul  Railway. 

8.  Chicago,  Rock  Island  &  Pacific  Railway. 

9.  Chicago,  St.  Paul,  Minneapolis  &  Omaha  Ry. 

10.  Choctaw  Railway  &  Lighting  Company. 

11.  The  Colorado  &  Southern  Railway  Company. 

12.  El  Paso  &  Southwestern  System. 

13.  Fort  Smith  &  Western  Railroad  Co. 


THE  EVIDENCE  35 

14.  Galveston,  Houston  &  Henderson  R.  R. 

15.  Great  Northern  Railway  Company. 

16.  Hillsboro  &  North  Eastern  Railway  Company. 

17.  Illinois  Central  Railroad  Company. 

18.  The  Kansas  City,  Mexico  &  Orient  Railroad  Com- 
pany. 

19.  The  Kansas  City  Southern  Railway  Co. 

20.  Midland  Valley  Railroad  Co. 

21.  The  Minneapolis  &  St.  Louis  Railroad  Company. 

22.  Minneapolis,  St.  Paul  &  Sault  Ste.  Marie  Ry. 

23.  Missouri  &  North  Arkansas  Railroad. 

24.  Missouri,  Kansas  &  Texas  Railway  Company. 

25.  Missouri,  Oklahoma  &  Gulf  Railway  Company. 

26.  The  Missouri  Pacific  Railway  Company. 

27.  St.  Louis,  Iron  Mountain  &  Southern  Railway  Co. 

28.  Morgan's  Louisiana  &  Texas  Railroad  &  Steam- 
ship Co. 

29.  Louisiana  Western  Railroad  Company. 

30.  Iberia  &  Vermillion  Railroad  Company. 

31.  Lake  Charles  &  Northern  Railroad  Company. 

32.  Northern  Pacific  Railway  Company. 

33.  Oregon  Short  Line  R.  R.  Co. 

34.  St.  Louis  &  San  Francisco  Railroad. 

35.  St.  Louis,  Rocky  Mountain  &  Pacific  Railway 
Company. 

36.  St.  Louis  Southwestern  Railway  Co. 

37.  The  Texas  &  Pacific  Railway  Company. 

38.  The  Trinity  &  Brazos  Valley  Railway  Co. 

39.  Union  Pacific  Railroad  Company. 

40.  The  Wabash  Railroad. 

41.  Wisconsin  &  Michigan  Railway. 

Some  of  these  are  subsidiaries  of  others.  The  reason 
for  arranging  them  in  that  manner  was  because  Mr. 
Wettling  did  so  as  to  his  companies,  whether  parent  or 
subsidiary,  in  the  body  of  his  exhibit  where  he  lists  his 
41  railroads.     This  is  a  striking  coincident  when  one 


36  THE  EVIDENCE 

finds  that  Mr.  Wettling  has  added  a  large  number  of 
weak  railroads,  and  omitted  a  number  of  strong  lines 
embraced  in  the  Commission's  order. 

In  addition  to  the  foregoing  railroads  that  were  spe- 
cifically named,  the  original  suspension  order  of  the  Com- 
mission also  included  a  long  list  of  tariffs  issued  by  the 
Western  Trunk  Line  Committee,  the  Trans-Missouri 
Committee  and  the  Southwestern  Committee.  The  sup- 
plemental orders  of  the  Commission  did  not  add  any 
carriers  of  substantial  importance  serving  this  same  ter- 
ritory, to  any  considerable  extent. 

If  a  person  took  all  the  railroads  named  in  the  com- 
mittee tariffs  which  have  been  suspended  by  the  Com- 
mission, he  would  undertake  an  analysis  of  several  hun- 
dred properties,  many  of  which  are  outside  of  the  terri- 
tory involved. 

A  railroad  like  the  Illinois  Central  has  over  eighty  per 
cent  of  its  mileage  on  which  there  would  not  be  one  car 
of  grain,  live  stock,  packing  house  products,  fruits  and 
vegetables  affected. 

The  principal  commodities  involved  in  the  present  pro- 
ceeding are  grain,  live  stock,  packing  house  products, 
fresh  meat,  coal,  fruits  and  vegetables,  hay,  straw,  broom 
corn  and  cotton  piece  goods. 

The  advances  in  grain  rates  are  proposed  from  the 
great  bulk  of  the  stations  in  Kansas,  Nebraska,  Iowa,  and 
several  hundred  stations  in  Minnesota,  South  Dakota  and 
the  southwestern  states,  to  all  of  the  principal  markets 
in  this  portion  of  the  United  States,  as  well  as  for  export ; 
also  on  the  proportionals  from  the  principal  markets, 
including  Chicago,  St.  Paul,  Omaha  and  St.  Louis,  to 
every  part  of  the  United  States,  and  for  export.  Ad- 
vances on  live  stock  are  proposed  from  the  great  bulk 
of  the  stations  in  the  same  territory.  The  territory  to 
which  each  of  the  advances  are  applicable  will  be  more 


THE  EVIDENCE  37 

definitely  described  in  separate  briefs,  covering  the  va- 
rious commodities. 

The  territory  embraced  in  the  proposed  tariffs  can  be 
roughly  described  as  Western  Trunk  Line,  Trans-Mis- 
souri and  Southwestern  Committee  territories,  embrac- 
ing a  portion  of  Illinois,  Wisconsin,  Minnesota,  North 
Dakota,  South  Dakota,  Iowa,  Nebraska,  Kansas,  Mis- 
souri, Arkansas,  Oklahoma,  Louisiana,  Texas,  together 
with  a  portion  of  Colorado  east  of  Denver. 

The  territory,  and  the  railroads  involved,  are  practic- 
ally the  same  as  those  embraced  in  the  two  cases  that 
were  decided  by  the  Interstate  Commerce  Commission 
February  22,  1911,  known  as  the  Western  Advance  Rate 
Case,  and  the  one  entitled  Texas  Railroad  Commission  v. 
Atchison,  Topeka  &  Santa  Fe  Railway  Co.,  et  al.,  being 
reported  in  20  I.  C.  C.  463-485. 

The  Southwestern  lines  in  the  Texas  Case  included: 
Atchison,  Topeka  &  Santa  Fe ;  Chicago,  Rock  Island 
&  Gulf;  Chicago,  Rock  Island  &  Pacific;  Fort 
Worth  &  Rio  Grande;  Galveston,  Houston  &  San 
Antonio;  Gulf,  Colorado  &  Santa  Fe;  Houston  & 
Texas  Central;  International  &  Great  Northern;  Mis- 
souri, Kansas  &  Texas;  St.  Louis  Southwestern;  St. 
Louis,  Iron  Mountain  &  Southern ;  Texas  &  Pacific. 

Referring  to  the  foregoing  list,  the  Commission  stated : 

'  ■  Of  the  four  trunk  lines  that  are  defendants,  viz., 
the  Missouri,  Kansas  &  Texas,  the  Atchison,  Topeka 
&  Santa  Fe,  the  Chicago,  Rock  Island  &  Pacific,  and 
the  St.  Louis  &  San  Francisco,  it  is  believed  that  the 
Missouri,  Kansas  &  Texas,  from  a  traffic  standpoint, 
is  probably  the  most  tvpical  and  representative." 
(Id.  20  I.  C.  C.  469.) 

It  will  be  noted  that  the  four  trunk  lines  defendants  in 
that  proceeding  are  also  respondents  in  the  present  case. 
It  will  further  be  observed  that  the  list  of  railroads  spe- 
cifically named  by  the  Commission  in  the  decision,  are 


38  THE  EVIDENCE 

practically  identical  with  the  Southwestern  lines 
respondents  in  the  present  proceeding.  In  addition  to 
those  specifically  named,  appearances  are  shown  in  that 
case  for  the  Southern  Pacific,  the  Missouri  Pacific,  and 
various  other  defendant  companies. 

In  our  discussion  of  the  issues  in  this  case  we  will  ob- 
serve the  same  division  of  companies  and  territories,  as 
was  adopted  by  the  railroads  and  by  the  Interstate  Com- 
merce Commission  in  1910.  There  are  certain  fundamen- 
tal traffic  conditions  and  financial  considerations  which 
justify  the  separation  that  was  made.  These  are  familiar 
to  any  person  acquainted  with  transportation  affairs  in 
the  West,  and  they  are  abundantly  exemplified  in  the 
record  in  this  case. 

Mr.  Wettling's  exhibit  presents  the  figures  for  41  sys- 
tems (so-called).  Mr.  Wright  says  that  includes  most  of 
the  principal  lines  throughout  that  territory  served.  The 
41  railroads  named  and  used  by  Mr.  Wettling  in  his  ex- 
hibit are  as  follows: 

Atchison,  Topeka  &  Santa  Fe. 

Chicago  &  Alton 

Chicago  &  North  Western 

Chicago,  St.  Paul,  Minneapolis  &  Omaha. 

Chicago,  Burlington  &  Quincy. 

Quincy,  Omaha  &  Kansas  City. 

Chicago,  Great  Western. 

Chicago,  Indiana  &  Southern. 

Chicago,  Milwaukee  &  St.  Paul. 

Chicago,  Eock  Island  &  Pacific. 

Colorado  &  Southern. 

Fort  Worth  &  Denver  City. 

Wichita  Valley. 

Colorado  Midland. 

Denver  &  Eio  Grande. 

Fort  Smith  &  Western. 

Illinois  Central. 


THE  EVIDENCE  39 


International  &  Great  Northern. 

Kansas  City  Southern. 

Louisiana  &  Arkansas. 

Minneapolis  &  St.  Louis. 

Iowa  Central. 

Minneapolis,  St.  Paul  &  Sault  Ste.  Marie. 

Wisconsin  Central. 

Missouri  &  North  Arkansas. 

Missouri,  Kansas  &  Texas. 

Missouri,  Oklahoma  &  Gulf. 

Missouri  Pacific. 

St.  Louis,  Iron  Mountain  &  Southern. 

New  Orleans,  Texas  &  Mexico. 

San  Antonio  &  Aransas  Pass. 

San  Antonio,  Uvalde  &  Gulf. 

St.  Joseph  &  Grand  Island. 

St.  Louis  &  San  Francisco. 

St.  Louis  Southwestern. 

Sunset  Central  Lines. 

Trinity  &  Brazos  Valley. 

Texas  &  Pacific. 

Texas  Mexican. 

Vicksburg,  Shreveport  &  Pacific. 

Wabash. 


40  THE  EVIDENCE 


MR.  WETTLING'S  LIST  OF  RAILROADS  HAS  ALL  THE  ESSEN- 
TIALS OF  A  SELECTED  LIST,  AND  CANNOT  BE  ACCEPTED 
EITHER  AS  COVERING  THE  SITUATION  AS  A  WHOLE,  OR 
AS  CONTAINING  THE  REPRESENTATIVE  RAILROADS  SERV- 
ING THE  TERRITORY  INVOLVED. 

By  strange  coincidence,  in  the  body  of  Mr.  Wettling's 
exhibit  he  lists  just  41  railroads,  each  one  as  an  individual 
company,  although  several  are  subsidiaries;  and  at  the 
same  time  we  find  in  the  original  suspension  order  of  the 
Commission  just  41  railroads  specifically  named,  several 
of  them  being  also  subsidiaries.  He  includes  a  large  num- 
ber of  railroads  not  named  in  the  suspension  order  of  the 
Commission  and  omits  railroads  that  are  specifically 
named  in  the  original  order  of  the  Commission.  The  rail- 
roads Mr.  Wettling  omits  are :  Great  Northern,  Northern 
Pacific,  Union  Pacific,  Oregon  Short  Line,  El  Paso  & 
Southwestern,  Fairmount  &  Veblin,  Kansas  City,  Mexico 
&  Orient,  Midland  Valley,  Wisconsin  &  Michigan,  St. 
Louis,  Rocky  Mountain  &  Pacific,  Lake  Charles  &  North- 
ern, Iberia  &  Vermillion,  Galveston,  Houston  &  Hender- 
son, Hillsboro  &  Northeastern,  Choctaw  Railway  &  Light- 
ing Co. 

Some  of  the  foregoing  were  subsidiaries  of  those  that 
were  named  in  the  Commission 's  orders.  Those  that  were 
not  named  in  the  Commission's  orders  and  not  subsid- 
iaries of  those  so  named,  and  yet  included  in  Mr.  Wett- 
ling's list,  are  as  follows: 

San  Antonio,  Uvalde  &  Gulf. 
San  Antonio  &  Aransas  Pass. 
International  &  Great  Northern. 
Texas  Mexican. 


THE  EVIDENCE  41 

Louisiana  &  Arkansas. 
Vicksburg,  Shreveport  &  Pacific. 

The  Chicago,  Indiana  &  Southern,  added  by  Mr.  Wett- 
ling,  while  included  in  a  supplementary  order  of  the  Com- 
mission, is  not  located  in  the  Western  District,  nor  is  it 
a  subsidiary  of  any  line  located  in  the  Western  District. 

In  this  list  of  railroads  which  Mr.  Wettling  omitted 
there  are  five  strong  properties. 

This  selection  of  railroads  is  not  excusable  on  the 
ground  that  he  simply  used  intrastate  roads  which  joined 
in  these  through  rates.  The  same  excuse  would  apply  to 
every  other  intrastate  railroad  in  the  same  territory.  On 
that  basis  he  left  out  over  two  hundred  railroads  that 
serve  this  same  territory.  These  are  named  on  pages  5 
and  5-A  of  Chambers '  Exhibit  1. 

This  selection  is  not  justified  on  the  ground  that  in 
order  to  include  Texas  railroads  he  had  to  take  some  in- 
trastate properties.  As  a  matter  of  fact,  the  original  sus- 
pension order  includes  9  railroads  that  go  into  Texas, 
as  follows : 

Atchison,  Topeka  &  Santa  Fe. 

Galveston,  Houston  &  Henderson. 

Kansas  City,  Mexico  &  Orient. 

Kansas  City  Southern. 

Missouri,  Kansas  &  Texas. 

Missouri,  Oklahoma  &  Gulf.  ,k 

St.  Louis  Southwestern. 

Texas  &  Pacific.  ► 

Trinity  &  Brazos  Valley. 


42  THE  EVIDENCE 

The  railroad  companies  used  by  Mr.  Wettling  in  his 
exhibit,  41  in  number,  serve  the  following  states  that  are 
located  in  Western  Classification  Territory : 


Louisiana 

Nebraska 

Arizona 

Arkansas 

North  Dakota 

Utah 

Missouri 

South  Dakota 

Idaho 

Iowa 

New  Mexico 

Washington 

Minnesota 

Colorado 

Wisconsin 

Texas 

"Wyoming 

Part  of  Illinois 

Oklahoma 

Montana 

California 

Kansas 

In  making  the  above  statement,  we  have  not  considered 
system  figures ;  but  we  have  used  the  so-called  property 
investment  figures  used  by  Mr.  Wettling,  to  determine  the 
mileage  covered  by  his  exhibits.  That  mileage  serves  the 
territory  we  have  described  above. 

The  railroads  Mr.  Wettling  included  earned  upon  the 
common  stock  during  the  fiscal  year  1914,  according  to 
the  preliminary  abstract  of  the  Interstate  Commerce 
Commission,  3.08%.  The  roads  Mr.  Wettling  left  out 
serving  the  same  territory,  earned  8.61%.  That  shows 
again  that  Mr.  Wettling 's  is  a  selected  list. 

If  the  railroads  in  Western  Classification  Territory  de- 
sired to  put  over  an  advance,  if  they  had  the  courage, 
they  could  leave  out  of  their  list  all  railroads  proposing 
advances,  all  the  strong  properties  and  include  all  of  the 
weak  lines.  The  result  when  you  compile  a  composite  or 
average  for  the  entire  group  would  be  extraordinarily 
low,  and  not  representative  of  the  character  of  the  terri- 
tory. Certainly  the  Commission  would  not  countenance 
such  procedure  as  that.  In  order  to  test  the  adequacy  of 
rates  as  a  whole  in  any  given  territory,  the  Commission 
would  surely  include  all  of  the  railroads  serving  to  a  sub- 
stantial extent  that  territory,  and  not  permit  such  an  av- 
erage figure  as  would  exclude  strong   lines,   to   be   ac- 


THE  EVIDENCE  43 

cepted  as  a  test.  Yet  that  is  precisely  what  these  West- 
ern railroads  have  undertaken  to  put  over  at  this  time, 
so  far  as  they  dared  to  go  in  that  direction. 

From  the  same  territory  as  covered  by  his  list,  Mr. 
Wettling  omitted  two  of  the  strongest  roads  in  the  North- 
west, the  Great  Northern  and  Northern  Pacific,  one  of 
the  strongest  in  the  central  portion,  the  Union  Pacific, 
and  one  of  the  strongest  in  the  South,  the  Southern  Pa- 
cific— which  latter  serves  the  same  territory  as  the  Santa 
Fe.  Mr.  Wettling  included  subsidiaries  of  the  Southern 
Pacific,  but  ignored  system  figures.  In  this  proceeding  the 
Interstate  Commerce  Commission  has  suspended  several 
thousand  advances  that  were  proposed  by  the  Great 
Northern  and  the  Northern  Pacific.  The  carriers  claim 
that  these  companies,  and  the  Union  Pacific,  will  receive 
a  very  small  amount  of  increased  revenue  because  of  the 
advances  on  the  Union  Pacific ;  it  being  claimed  that  they 
will  amount  to  $12,000  (tr.  14460-1-5)  on  the  Great  North- 
ern, and  $19,000  (tr.  14806)  on  the  Northern  Pacific. 

The  carriers  have  been  required  to  file  their  division 
sheets.    Let  us  consider  the  question  on  its  merits. 

Advances  in  the  grain  rates  are  proposed  from  prac- 
tically every  town  in  the  states  of  Kansas  and  Nebraska, 
but  because  the  Union  Pacific  does  not  go  east  of  the 
Missouri  River,  the  claim  is  made  that  it  only  shares  in 
the  advances  to  a  small  extent.  Two-thirds  of  the  mile- 
age of  the  Union  Pacific  is  located  in  these  two  states. 
Advances  are  proposed  on  the  other  interstate  railroads 
serving  those  states,  and  most  of  these  are  included  in 
Mr.  Wettling 's  list.  Why  should  not  the  Union  Pacific 
be  included?  There  are  other  advances  it  is  proposing. 
The  Union  Pacific  will  profit  by  reason  of  the  advances 
in  passenger  rates,  to  the  extent  of  large  sums  of  addi- 
tional revenue.  It  will  also  profit  by  the  elimination  of 
the  concentration  of  poultry,  butter  and  eggs;  a  privi- 


44  THE  EVIDENCE 

lege,  when  taken  away,  that  will  serve  to  advance  freight 

rates.  It  will  also  profit  by  special  charges  for  demur- 
rage, for  stopping  to  finish  loading  live  stock,  by  the 
elimination  of  the  stoppage-in-transit  privilege  on  agri- 
cultural implements.  The  Union  Pacific  is  participating 
with  all  the  rest  of  the  western  railroads  in  a  general 
movement  to  increase  their  revenues. 

Mr.  Hawley,  who  is  secretary  to  Mr.  Lane  (the  presi- 
dent of  the  Union  Pacific  Railroad)  and  is  in  the  traffic 
department,  representing  the  General  Freight  Agent, 
testified  as  follows: 

"Mr.  Thome:  What  was  your  volume  of  grain  traf- 
fic from  Nebraska  and  Kansas  ? 

"Mr.  Hawley:    I  have  no  figures. 

"Mr.  Thome:    It  is  very  large,  is  it  not? 

"Mr.  Hawley:  Yes;  grain  is  one  of  our  leading 
commodities. 

"Mr.  Thorne  Two-thirds  of  the  mileage  of  your 
railroad  is  located  in  Kansas  and  Nebraska,  is  it  not, 
if  you  exclude  your  system? 

1 '  Mr.  Hawley :    I  would  say  so ;  yes,  sir. 

"Mr.  Thorne:  There  are  advances  in  the  grain 
rates,  whether  you  get  any  share  of  it  or  not,  from 
every  one  of  those  stations,  is  there  not  ? 

"Mr.  Hawley:    There  is. 

"Mr.  Thorne:  You  also  are  participating  in  this 
general  movement  to  increase  your  charges  for  spe- 
cial services,  stoppage  in  transit,  demurrage,  etc., 
heater  service  and  refrigeration? 

"Mr.  Hawley:  I  have  no  definite  knowledge  to 
that  effect. 

"Mr.  Thorne:  That  is  true,  generally  speaking, 
is  it  not? 

"Mr.  Hawlev:  Generaliv  speaking  I  understand 
it  is  the  entire  West.    (tr.  14475-6.) 

"Mr.  Thorne :  Mr.  Wright,  would  you  also  care  to 
produce  the  men  that  can  tell  us  how  much  increased 
revenue  there  will  be  on  the  Oklahoma  Gulf,  the 


THE  EVIDENCE 


45 


Northeastern  Texas  &  Mexico,  the  San  Antonio, 
Uvalda  &  Gulf,  the  Missouri,  Oklahoma  &  Gulf,  the 
Missouri  &  North  Arkansas?    (tr.  14477.) 

"Mr.  Wright:  I  want  to  say  to  the  Commission, 
as  to  the  good  faith  in  the  selection  of  the  roads,  that 
it  was  made  on  account  of  this  attack.  I  propose  to 
give  to  the  Commission  as  fully  and  fairly  as  I  can 
what  the  situation  is,  so  they  may  understand  what 
the  conditions  are,  and  if  there  is  any  criticism  in  it 
I  will  take  it,  but  that  is  the  only  reason  and  purpose 
for  which  I  put  this  in,  because  of  that  objection  and 
attack."    (tr.  14477-8.) 


46  THE  EVIDENCE 

The  accompanying  map  shows  by  dashed  lines  the  lo- 
cation of  the  Great  Northern,  Northern  Pacific  and  Union 
Pacific;  while  the  solid  lines  indicate  the  location  of  the 
railroads  serving  the  same  territory,  but  included  in  Mr. 
Wettling's  list  of  railroads. 

The  Commission  has  separated  the  passenger  rate  case 
from  the  freight  department  of  the  investigation  and  yet 
the  railroads  are  here  trying  to  establish  the  inadequacy 
of  revenues  as  a  whole  on  the  value  of  their  property. 
This  necessarily  involves  both  the  passenger  and  freight 
traffic.  If  the  case  had  been  consolidated,  the  Union  Pa- 
cific would  have  been  involved.  It  is  not  fair  to  take  out 
a  few  of  the  strongest  roads  in  the  territory,  eliminate 
them  from  your  figures,  and  then  prepare  a  consolidated 
average  figure  purporting  to  represent  the  revenues  of 
all  the  railroads  serving  the  territory  as  a  whole.  Even 
if  they  did  not  obtain  a  cent  of  additional  revenue  from 
this  particular  case;  even  if  they  absolutely  refrained 
from  filing  a  tariff  or  joining  in  any  tariff  proposing  any 
advances,  so  as  to  be  taken  out  of  the  case ;  still  this  Com- 
mission should  exclude  such  a  railroad  which  has  half  or 
two-thirds  of  its  mileage  in  the  territory  in  any  analysis  of 
the  financial  and  traffic  conditions  and  adequacy  of  the 
rate  structure  in  that  section  of  the  country;  otherwise 
the  large  railroads  will  always  keep  out  and  let  the  weak 
properties  prove  up  their  case.  Later,  when  conclusions 
are  reached  as  to  the  adequacy  of  revenues  as  a  whole  in 
a  given  section,  whether  state,  territory  or  district,  and 
that  issue  is  closed,  then  the  larger  lines  can  come  in  and 
profit  by  other  advances,  as  these  large  companies  are 
doing  at  this  time. 

Attention  is  called  to  the  fact  that  Mr.  Wright  was 
very  much  more  enthusiastic  about  establishing  addition- 
al revenues  of  the  Union  Pacific  or  Great  Northern  than 
on  some  of  the  Southwestern  lines.  Yet  he  includes  the 
Southwestern  lines  and  excludes   the    Great   Northern. 


THE  EVIDENCE  47 

Some  of  these  little  roads  have  not  over  200  miles  of 
track. 

There  is  some  confusion  as  to  the  precise  boundary- 
lines  of  the  Western  Trunk  Line  territory,  and  whether 
the  Great  Northern,  Northern  Pacific  and  Union  Pacific 
should  be  included  in  our  table.  The  index  of  stations 
published  by  the  Western  Trunk  Line  Committee  in- 
cludes no  points  in  Kansas  and  Nebraska,  and  yet  Mr. 
Spens  admitted  on  the  stand  that  certain  traffic  to  and 
from  points  in  Kansas  and  Nebraska  was  governed  by 
the  Western  Trunk  Line  Committee,  (tr.  14707;  14711-12.) 
Further,  Mr.  Condran  testified  in  support  of  the  same 
proposition,    (tr.  13296-8;  13299-13301.) 

We  also  call  your  attention  to  the  tariff  publications  of 
these  committees.  For  instance,  turning  at  random  to 
Supplement  27,  Freight  Tariff  No.  13-G,  of  the  Western 
Trunk  Lines,  immediately  below  it  are  listed  the  railroads 
issuing  the  publication.  Among  these  are  the  Great 
Northern  and  Northern  Pacific  Railways. 

If  you  will  turn  to  Freight  Tariff  No.  18-H  of  Western 
Trunk  Lines,  you  will  find  the  issuing  carriers  are  the 
Union  Pacific,  Northern  Pacific  and  Great  Northern. 

Turning  to  Supplement  No.  42  to  Circular  I-J  of 
Western  Trunk  Lines,  you  will  find  among  the  carriers 
stated  on  the  cover  page,  as  issuing  the  same,  to  be  the 
Northern  Pacific  and  Great  Northern  Railways. 

Freight  Tariff  No.  80-A,  Western  Trunk  Lines,  names 
the  Northern  Pacific  and  Great  Northern. 

Freight  Tariff  No.  54  of  Western  Trunk  Lines  names 
the  Northern  Pacific,  Union  Pacific  and  Great  Northern. 

Further  we  call  your  attention  to  the  fact  that  all  three 
of  these  railroads  were  specifically  named  as  respondents 
in  this  case,  in  the  suspension  order  made  by  the  Inter- 
state Commerce  Commission. 

Mr.  Wettling,  the  principal  witness  for  the  carriers, 


48  THE  EVIDENCE 

when  on  the  stand  was  asked  to  name  the  representative 
roads  serving  the  states  of  Iowa,  Minnesota,  North  Dako- 
ta, South  Dakota  and  Nebraska,  and  he  included  in  his  list 
the  Great  Northern,  Northern  Pacific  and  Union  Pacific, 
(tr.  8627.) 

Mr.  Wettling  has  left  out  one  of  tne  strongest  proper- 
ties in  the  South — the  Southern  Pacific  System;  although 
he  included  some  of  the  weak  subsidiaries  of  this  system 
that  were  earning  deficits,  leaving  out  the  parent  com- 
pany, which  is  one  of  the  richest  in  the  whole  territory. 
It  is  true  the  system  goes  from  Texas  to  California,  but 
it  is  also  true  that  the  Santa  Fe  goes  to  California,  and  he 
included  the  Santa  Fe  System.  Further,  it  will  be  noticed 
that  one  of  the  strongest  roads  in  the  central  part  of  the 
territory,  is  the  Union  Pacific  which  Mr.  Wettling  care- 
fully omitted  from  his  consolidated  average ;  that  the  two 
strongest  lines  in  the  northern  part  of  the  territory,  the 
Northern  Pacific  and  the  Great  Northern,  were  again 
carefully  omitted  from  the  list. 

The  North  Western  is  trying  to  profit  in  the  same  way 
as  the  Great  Northern.  If  the  North  Western  can  in- 
clude in  the  list  making  up  the  average  the  extremely 
weak  lines  of  the  southwest,  and  exclude  the  exceedingly 
strong  lines  of  the  northwest,  of  course  it  would  drive 
the  average  down  that  much,  even  though  a  lot  of  strong 
lines  are  left  in  the  list. 

That  method  of  proving  the  inadequacy  of  rates  in  a 
given  territory,  is  shrewd,  immensely  shrewd;  but  pos- 
sibly shortsighted  in  its  shrewdness.  By  the  same  course 
of  procedure  the  Eastern  railroad  could  have  eliminated 
the  Pennsylvania,  the  New  York  Central,  and  the  Balti- 
more &  Ohio  from  their  averages.  By  the  same  course  of 
procedure  in  the  1910  Advance  Rate  Case,  the  railroads 
could  have  eliminated  the  Burlington  and  the  Santa  Fe. 

At  the  beginning  of  the  case  Mr.  Wright  laid  great 
stress  on  the  proposition  that  they  were  going  to  consider 


THE  EVIDENCE  49 

the  territory  as  a  whole  and  not  to  pick  out  the  weak  or 
the  strong;  further,  he  said  they  had  included  in  their 
figures  all  of  the  important  lines  in  the  territory ;  the  fol- 
lowing is  his  exact  language : 

"We  have  selected  the  principal  lines  which  con- 
stitute 41  lines  and  systems.  The  roads  which  we 
have  selected  embrace  practically  all  of  the  mileage 
in  that  territory  of  any  important  lines. ' ' 

The  carriers  have  failed  to  carry  out  that  promise. 
In  their  consolidated  figures  offered  by  Mr.  Wettling  for 
the  railroads  as  a  whole,  instead  of  covering  all  the  rail- 
roads serving  the  particular  territory  described  by  Mr. 
Wettling,  they  have  used  a  selected  list;  a  selected  list 
that  is  unjustifiably  distorted,  and  presents  results  that 
are  deceptive  and  misleading. 

For  the  foregoing  reasons,  in  our  tables  and  discus- 
sions we  will  seldom  make  reference  to  the  list  of  rail- 
roads that  Mr.  Wettling  selected.  We  prefer  to  use  the 
list  of  railroads  the  Commission  named  in  their  suspen- 
sion orders. 

We  find  the  railroads  specifically  named  in  the  suspen- 
sion order  of  the  Commission  in  this  case  to  fairly  repre- 
sent the  territory  sought  to  be  covered. 

It  will  probably  be  conceded  by  all  parties  that  the 
bulk  of  the  advances  lie  in  the  following  states :  Minneso- 
ta, North  Dakota,  South  Dakota,  Nebraska,  Iowa,  Kan- 
sas, Oklahoma,  Texas,  Missouri,  Arkansas  and  Louisiana. 
The  Commission's  original  suspension  order  named  37 
railroads,  and  four  parts  of  railroads  or  subsidiary  com- 
panies, making  in  all  41  railroads ;  if  you  use  that  term  in 
the  same  way  that  Mr.  Wettling  arrives  at  his  41  rail- 
roads. 

On  page  1  of  Vol.  1  of  Wettling 's  exhibits,  he  lists  36 
railroads  and  28  subsidiaries.  Turning  to  any  page  of 
his  summaries  which  purport  to  cover  the  41  railroads — 


50  THE  EVIDENCE 

for  instance,  page  11 — you  will  readily  see  what  we  state 
is  correct.  It  will  be  noticed  that  he  considers  the  fol- 
lowing as  distinct  railroads,  and  among  his  41,  without 
any  indication  of  their  being  subsidiary,  and  without  any 
attempt  to  compile  a  system  figure : 

Roads  included  in  Wettling  list  of  41  which  are  sub- 
sidiary lines: 

Quincy,  Omaha  &  Kansas  City,  subsidiary  of  C,  B.  & 
Q. ;  Fort  Worth  and  Denver  City,  subsidiary  of  Colo. 
Southern ;  Wichita  Valley,  subsidiary  of  Colo.  Southern ; 
Iowa  Central,  subsidiary  of  M.  &  St.  L. ;  Wisconsin  Cen- 
tral, subsidiary  of  M.,  St.  P.  &  S.  S.  M. ;  St.  Louis,  Iron 
Mountain  &  Southern,  subsidiary  of  Missouri  Pac. ;  New 
Orleans,  Texas  &  Mexico,  subsidiary  of  St.  L.  &  San 
Fran.;  St.  Joseph  &  Grand  Island,  subsidiary  of  Union 
Pac;  Sunset  Central  Lines,  subsidiaries  of  Southern 
Pac. ;  Trinity  &  Brazos  Valley,  subsidiary  of  C,  R.  I.  &  P. 
and  Colo.  Southern. 

The  Commission's  list  of  railroads  includes  every  in- 
terstate railroad  serving  what  we  have  described  as  the 
Northwestern  territory  (north  of  Kansas  and  Missouri) 
except  two  properties  of  insignificant  character,  as  fol- 
lows :  The  Duluth,  South  Shore  &  Atlantic  (which  is  in 
the  northern  part  of  Michigan  and  entirely  outside  of 
the  Northwestern  territory  as  previously  described) ;  and 
the  Kansas  City,  Clinton  &  Springfield  (an  unimportant 
short  line  of  railroad  independent  of  any  system  in  the 
case,  having  162  miles,  practically  an  intrastate  road  in 
Missouri,  a  railroad  that  has  not  filed  any  tariffs  that 
have  been  suspended  in  this  case). 

Further,  the  Commission's  list  in  its  original  suspen- 
sion order  includes  all  interstate  railroads  serving  the 
Southwestern  territory,  with  only  exceptions  as  follows : 
Louisiana  &  Northwest,  Louisiana  &  Arkansas,  and  Ar- 
kansas, Louisiana  &  Gulf.  They  are  unimportant,  inde- 
pendent short  lines  of  railroad  in  Louisiana  and  Arkan- 


THE  EVIDENCE  51 

sas,  scarcely  more  than  logging  roads,  and  have  filed  no 
tariffs  that  have  been  suspended  in  this  case.  (tr.  13139.) 
The  bulk  of  advances  involved  in  the  case  are  located 
in  the  states  above  named,  which  comprise  what  is  known 
as  Western  Trunk  Line,  Trans-Missouri  and  Southwest- 
ern Committee  territories.  The  tariff  publications  of 
all  three  of  these  committees  are  embraced  also  in  the 
suspension  order  of  the  Commission.  For  these  reasons 
we  use  the  Interstate  Commerce  Commission  list  of  rail- 
roads. 

The  territory  involved  falls  naturally  into  two  groups, 
the  railroads  operating  in  the  territory  north  of  the  line 
between  Nebraska  and  Kansas  and  between  Iowa  and 
Missouri.  With  only  one  or  two  exceptions,  the  same 
carriers  have  but  little  mileage,  common  to  both  terri- 
tories. There  is  just  as  distinct  a  demarkation,  if  not 
more  so,  in  this  respect  with  regard  to  the  territory  here 
under  consideration,  as  that  which  exists  between  the 
Eastern  and  Southern  districts,  as  classified  by  the  Inter- 
state Commerce  Commission,  lying  east  of  the  Missis- 
sippi River. 

In  our  subsequent  discussion,  we  will  refer  to  three 
groups,  first,  the  Northwestern  group,  which  includes  all 
railroads  embraced  in  the  suspension  order  of  the  Com- 
mission that  serve  the  territory  above  described,  north 
of  the  line  between  Nebraska  and  Kansas,  etc.,  and  ex- 
cluding only  those  lines,  two-thirds  or  more  of  whose 
mileage  lies  outside  of  the  territory  described.  We  have 
included,  in  what  we  shall  call  the  Southwestern  group, 
all  the  railroads  serving  the  territory  south  of  the  line 
above  referred  to,  and  embraced  in  the  Commission's  sus- 
pension order,  excluding  only  those  having  two-thirds  of 
their  mileage  outside  of  the  said  territory.  The  relative 
size  of  these  territories  is  indicated  by  the  accompanying 
map. 


52 


THE  EVIDENCE 


A  fact,  worthy  of  mention  at  this  time,  is  in  re- 
gard to  the  Illinois  Central.  This  property  falls  in  the 
Southern  district,  where  it  has  been  classified  by  the 
Interstate  Commerce  Commission.     In  the  first  place, 


THE  EVIDENCE  63 

it  has  only  16%  of  its  mileage  in  this  territory  west  of 
the  Mississippi  Eiver,  if  you  consider  the  railway  proper, 
and  only  9%  of  its  mileage  if  you  consider  the  system  as 
a  whole.  The  Commission  itself,  as  stated,  classifies  this 
road  in  another  territory  than  the  one  we  are  considering. 
With  84  to  90%  of  its  mileage  outside  of  the  territory, 
it  is  not  fair  to  consider  it  a  representative  railroad 
in  this  section. 

In  making  our  grouping  of  railroads  we  have  studious- 
ly avoided  any  bias.  We  have  sought  to  be  absolutely 
fair,  using  not  a  selected  list,  but  every  railroad,  whether 
weak  or  strong,  rich  or  poor,  that  has  at  least  one-third 
of  its  mileage  within  the  territory. 

The  Commission  may  decide  that  it  is  time  for  it  to 
recognize  differences  in  the  territory,  in  the  traffic,  and 
in  the  financial  conditions  of  the  carriers  throughout  this 
great  western  two-thirds  of  the  nation. 

You  have  already  made  a  separation  of  the  companies 
in  the  east.  You  divide  one-third  of  the  nation  into  two 
groups,  and  you  leave  the  other  two-thirds  of  the  nation 
in  one  group  or  district.  The  differences  in  traffic  con- 
ditions, and  in  the  financial  status  of  the  western  rail- 
roads have  been  established  by  this  record,  by  the  wit- 
nesses testifying  on  behalf  of  the  public,  as  well  as  those 
representing  the  railway  companies. 

This  Commission  itself  has  had  occasion  to  make  a 
separation  of  the  Western  railroads,  and  you  have  reach- 
ed different  conclusions  as  to  the  financial  needs  of  the 
Southwestern  and  Northwestern  companies.  In  the  case 
entitled  Railroad  Commission  of  Texas  v.  A.,T.  &  S.  Fe, 
et  al.,  20  I.  C.  C.  463,  the  rates  involved  affected  traffic 
to  and  from  Texas,  but  you  did  not  attempt  to  make  any 
separation  of  that  traffic  for  the  purpose  of  analyzing  the 
financial  needs  of  the  carriers.  Instead  of  that,  you  made 
a  comprehensive  analysis  of  the  adequacy  of  their  rev- 


54  THE  EVIDENCE 

enues  from  their  entire  lines.  The  group  of  railroads 
covered  by  you  in  that  case  included  the  Atchison,  Topeka 
&  Santa  Fe,  Chicago,  Rock  Island  &  Pacific,  Chicago,  Rock 
Island  &  Gulf,  Fort  Worth  &  Rio  Grand,  Galveston, 
Harrisburg  &  San  Antonio,  Gulf,  Colorado  &  Santa  Fe, 
Houston  &  Texas  Central,  Missouri,  Kansas  &  Texas,  In- 
ternational &  Great  Northern,  St.  Louis  Southwestern, 
St.  Louis,  Iron  Mountain  &  Southern  and  Texas  &  Pacific 
in  addition.  While  that  list  embraced  practically  all  that 
you  made  mention  of  in  the  decision,  yet  it  will  be  noted 
that  the  Missouri  Pacific  was  also  a  party  defendant,  and 
was  represented  in  the  trial,  as  well  as  other  companies. 
In  discussing  the  railroads  involved  in  the  case,  you 
stated  the  following : 

"Of  the  four  trunk  lines  that  are  defendants, 
namely  the  Missouri,  Kansas  &  Texas,  the  Atchison, 
Topeka  &  Santa  Fe,  the  Chicago,  Rock  Island  & 
Pacific  and  the  St.  Louis  &  San  Francisco,  it  is  be- 
lieved that  the  Missouri,  Kansas  &  Texas  from  a 
traffic  standpoint  is  probably  the  most  typical  and 
representative. ' ' 

You  follow  this  with  a  somewhat  elaborate  analysis  of 
the  financial  condition  of  the  Missouri,  Kansas  &  Texas. 
The  foregoing  list  of  railroads  corresponds  very  closely 
to  what  we  have  described  in  this  case  as  belonging  to  the 
Southwestern  Group. 

It  will  be  found  that  there  are  very  substantial  dif- 
ferences in  the  financial  and  operating  conditions  of  the 
Northwestern  and  Southwestern  railroads. 

NORTHWESTERN  GROUP. 

On  the  same  day  that  this  Commission  rendered  its 
decision  in  the  case  of  Texas  Railroad  Commission  v.  A., 
T.  &  S.  Fe,  et  al.,  supra,  you  also  rendered  your  decision 
in  the  case  commonly  known  as  the  Western  Advance 
Rate  Case,  this  being  February  22, 1911. 


THE  EVIDENCE  55 

In  this  case  the  carriers  proposed  general  advances  on 
commodity  rates,  principally  between  the  Missouri  River 
and  Chicago,  although  there  were  advances  from  points 
west  of  the  river.  At  the  present  time  the  railroads  are 
proposing  various  ways  of  increasing  their  revenues 
throughout  the  territory,  both  east  and  west  of  the  Mis- 
souri River.  An  advance  in  freight  rates  on  grain  and 
live  stock  will  affect  practically  all  the  towns  in  Kansas 
and  Nebraska.  The  advances  on  grain  go  clear  up  into 
northern  Minnesota. 

Advances  are  also  proposed  on  packing  house  products, 
mill  products,  fruits  and  vegetables,  coal  and  broom  corn. 
They  reach  up  into  North  Dakota,  South  Dakota  and  as 
far  south  as  Oklahoma  and  Texas,  and  to  the  Denver, 
Colorado,  common  point  district. 

In  addition  to  these  specific  rate  advances,  carriers 
are  proposing  the  elimination  of  stoppage  in  transit 
privileges  on  agricultural  implements,  concentration  of 
dairy  food  products,  demurrage  charges,  and  a  wholesale 
advance  in  passenger  rates  throughout  all  this  Western 
territory. 

Our  original  petition  asks  that  all  these  matters  be  con- 
solidated, and  an  investigation  as  to  the  adequacy  of  the 
revenues  as  a  whole  be  made,  but  because  of  the  varying 
conditions  surrounding  the  different  propositions  at 
stake,  these  cases  have  been  separated  to  some  extent. 

There  are  several  ways  of  analyzing  the  adequacy  of 
revenues.  One  is  to  select  three  or  four  typical,  repre- 
sentative lines,  and  investigate  them,  somewhat  exten- 
sively. That  course  was  pursued  quite  generally  in  the 
1910  cases.  A  second  method  is  to  take  practically  all  of 
the  carriers  serving  a  given  territory  and  arrive  at  a  con- 
solidated average.  In  either  event,  the  selection  of  your 
roads  becomes  of  paramount  importance,  and  will  con- 
trol the  conclusions  that  you  may  reach.  In  every  terri- 
tory, and  in  every  industry,  there  are  weak  roads  and 


56  THE  EVIDENCE 

strong  roads.  At  the  very  outset,  the  greatest  of  caution 
and  deliberation  should  be  taken ;  if  you  select  weak  roads 
you  can  prove  one  thing;  if  you  select  strong  roads  you 
can  prove  another. 

This  becomes  of  especial  importance  also  when  you 
adopt  a  so-called  consolidated  figure,  representing  the 
conditions  in  a  certain  territory  as  a  whole.  In  any  given 
territory  only  10  or  15%  of  the  mileage  of  some  roads  ex- 
ists. If  you  include  such  companies  as  that,  you  are  test- 
ing the  adequacy  of  revenues  in  another  portion  of  the 
nation  where  85%  of  their  traffic  lies.  On  the  other  hand, 
if  by  some  device  or  other  you  can  arrange  to 
eliminate  a  few  of  your  strong  roads  in  any  given  terri- 
tory, although  you  may  keep  in  the  rest  of  your  strong 
roads,  you  will  reduce  your  average  figure  by  that  amount- 

Another  complication  comes  in  the  amount  of  terri- 
tory that  has  to  be  considered.  The  Supreme  Court  has 
found  it  possible  to  consider  individual  roads  in  a  given 
state;  further  to  consider  the  state  as  a  whole,  and 
analyze  the  adequacy  of  revenues  in  that  section  of  the 
country.  These  great  western  states  are  as  large  as 
many  of  the  European  nations.  If  the  Supreme  Court 
can  find  it  advisable  to  perform  that  task,  this  Com- 
mission can.  Because  rates  are  inadequate  in  Arizona  is 
no  sign  that  they  are  inadequate  in  Illinois. 

It  is  much  easier  to  analyze  conditions  where  a  certain 
group  of  railroads  handles  the  bulk  of  the  traffic  and 
the  bulk  of  the  mileage  of  the  said  railroads  is  located 
in  that  territory.  That  has  been  the  occasion  for  the 
grouping  of  companies  into  different  territories  by  this 
Commission  in  the  past. 

It  must  be  remembered  that  Western  Classification 
Territory  is  twice  as  large  as  the  Central  Freight  Asso- 
ciation, New  England,  Eastern  Trunk  Line  and  the 
Southern  Districts  all  put  together. 


THE  EVIDENCE  67 

In  adopting  some  divisional  line,  many  things  must 
be  considered.  One  important  effort  should  be  to  make  the 
grouping  fairly  represent  the  territory.  Sixteen  per  cent 
of  the  mileage  of  the  Illinois  Central  Railroad  is  located 
west  of  the  Mississippi  River.  Not  a  car  of  grain  or 
live  stock,  or  packing  house  products,  fruits  and  vege- 
tables, moving  on  80%  of  the  mileage  of  the  Illinois  Cen- 
tral system  will  be  affected  by  the  advances  proposed  in 
this  case. 

Thirty  per  cent  of  the  mileage  of  the  Wabash  is  lo- 
cated west  of  the  Mississippi  River.  The  same  comment 
is  applicable  to  that  company. 

The  territory  directly  concerned  in  this  case  covers  the 
following  eleven  states : 

Minnesota  Kansas 

Iowa  Missouri 

North  Dakota  Arkansas 

South  Dakota  Louisiana 

Nebraska  Oklahoma 

Texas 

This  territory  very  naturally  divides  itself  into  two 
groups.  We  will  call  one  the  Northwestern  Territory,  the 
other  the  Southwestern  Territory.  There  are  several  -rea- 
sons why  one  group  is  quite  distinct  from  the  other.  The 
great  bulk  of  the  mileage  of  the  Chicago,  Burlington  & 
Quincy,  Chicago  &  North  Western,  Chicago,  Milwaukee  & 
St.  Paul,  Great  Northern,  Union  Pacific,  Northern 
Pacific,  Minneapolis  &  St.  Louis,  Soo  Line,  Iowa  Cen- 
tral, Chicago,  Great  Western,  is  located  in  the  North- 
western group.  On  the  other  hand,  the  great  bulk  of 
the  mileage  of  the  St.  Louis  &  San  Francisco,  Missouri 
Pacific,  Atchison,  Topeka  &  Santa  Fe,  Chicago,  Rock 
Island  &  Pacific,  St.  Joseph  &  Grand  Island,  St.  Louis, 
Iron  Mountain  &  Southern,  Kansas  City,  Mexico  &  Ori- 
ent, Galveston,  Houston  &  Henderson,  Ft.  Worth  &  Den- 
ver City,  Trinity  &  Brazos  Valley,  St.  Louis,  El  Reno 


58  THE  EVIDENCE 

&  Western,  Ft.  Smith  &  Western,  Missouri  &  North 
Arkansas,  Missouri,  Oklahoma  &  Gulf,  Midland  Valley, 
Lake  Charles  &  Northern,  Iberia  &  Vermillion,  Louisiana 
Western,  Morgan's  Louisiana  &  Texas,  St.  Louis  South 
Western,  Kansas  City  Southern,  Texas  &  Pacific,  Mis- 
souri, Kansas  &  Texas,  is  located  south  of  the  line  divid- 
ing Kansas  from  Nebraska. 

The  only  railroad  that  overlaps  to  any  extent  in  the 
two  territories  is  the  Rock  Island,  but  practically  two- 
thirds  of  its  mileage  is  south  of  the  line  we  have  indicated. 
Another  very  important  fact  is  that  the  Rock  Island  was 
in  a  very  prosperous  condition  until  it  began  building  and 
reaching  out  into  the  Southwest.  It  is  either  that  fact 
or  its  contact  with  the  Moores  and  Reeds  (and  more  prob- 
ably both)  that  has  produced  the  present  condition  of  the 
Rock  Island. 

There  are  four  reasons  why  the  Rock  Island  belongs 
fairly  to  the  Southwestern  group. 

First:  The  bulk  of  its  mileage  and  traffic  is  in  the 
Southwestern  territory  as  described  above. 

Second:  As  long  as  its  mileage  was  confined  to  the 
Northwest  the  prosperity  and  financial  condition  of  the 
company  was  analogous  to  the  representative  lines  of  the 
Northwest,  and  there  is  apparently  no  reason  today  why 
it  should  not  be  on  the  same  plane,  because  it  has  a  very 
large  tonnage  in  that  territory,  reaches  large  terminals, 
has  main  lines  and  feeders. 

Third :  Mr.  Wettling,  who  was  the  chief  witness  for  the 
railway  companies  in  this  case,  classified  the  Rock  Island 
as  a  Southwestern  line,  making  the  statement  as  follows: 

"Mr.  Thorne:  Now,  considering  the  territory 
south  of  the  line  (tr.  4070)  we  have  been  discussing; 
what  would  you  say  were  the  four  representative  rail- 
roads serving  that  territory? 

"Mr.  Wettling:  The  Santa  Fe,  the  Rock  Island, 
the  Missouri,  Kansas  &  Texas,  and  in  the  extreme 


THE  EVIDENCE  59 

south  the  Sunset  Central  Lines.  The  Frisco  is  an- 
other that  I  really  ought  to  include  with  the  group. 

1 '  Commissioner  Daniels :  Would  you  omit  the  Mis- 
souri Pacific  f 

"Mr.  Wettling:  I  do  not  like  to  omit  the  Missouri 
Pacific,  but  I  was  calling  the  largest  of  the  systems. 

"Mr.  Thome:  Again,  what  would  you  say  would 
be  the  four  representative  lines  in  that  territory? 

"Mr.  Wright:  Do  you  mean  the  biggest  mileage, 
or  what  do  you  mean  f 

"Mr.  Thome:    No. 

1 '  Mr.  Wright :  You  can  make  them  representative 
in  several  ways.    That  is  the  difficulty. 

"Mr.  Wettling:  The  Santa  Fe,  I  should  say,  would 
be  probably  named  first.  I  think  the  Rock  Island  is 
a  representative  line  through  the  territory  in  the 
south  and  west  of  here,  and  has  the  largest  percent- 
age of  its  mileage  south  of  the  line  named.  The  Mis- 
souri Pacific  with  the  Iron  Mountain  would  probably 
be  more  representative  than  the  Missouri,  Kansas  & 
Texas  alone."     (tr.  4071.) 

It  is  interesting  to  note  that  Mr.  Wettling 's  selection 
of  the  representative  Southwestern  lines  corresponds  pre- 
cisely, with  one  exception,  with  the  selection  made  by  the 
Interstate  Commerce  Commission  of  the  Southwestern 
line  in  the  case  of  Railroad  Commission  of  Texas  v.  A., 
T.  &  S.  Fe,  et  ah,  20  I.  C.  C.  463.  The  exception  referred 
to  is  that  the  Commission  named  the  St.  Louis  &  San 
Francisco  instead  of  the  Missouri  Pacific,  named  by  Mr. 
Wettling. 

Fourth :  Mr.  Millard,  witness  offered  by  the  Interstate 
Commerce  Commission,  classified  the  Rock  Island  as  a 
representative  Southwestern  line,  and  used  the  North 
Western  road  as  a  representative  Northwestern  line. 

"The  North  Western  and  Rock  Island  furnished 
the  most  elaborate  scheme  of  traffic  statistics.  On  no 
other  railroads  could  I  find  the  number  of  merchan- 
dise cars,  with  the  exception  of  the  Santa  Fe,  and 
their  traffic  statistics  are  not  compiled  on  the  same 
basis  as  these  others.    I  chose  the  Rock  Island  be- 


60  THE  EVIDENCE 

cause  it  was  a  Southwestern  road,  and  the  North 
Western  because  it  served  the  Western  Trunk  Line 
territory."    (tr.  12957.) 

JUSTIFICATION  FOR  DIVISION  OF  THE  SOUTHWESTERN  AND 
NORTHWESTERN  GROUPS. 

First:  The  Commission  itself  made  a  similar  division, 
or  grouping,  of  these  railroads  in  1910. 

Second:  The  traffic  conditions  justify  the  separation. 
Illustrating  this  fact  concretely,  we  cite  the  following 
from  the  testimony  of  Mr.  Schaff,  President  of  the  Mis- 
souri, Kansas  &  Texas : 

''There  are  special  difficulties  attached  to  railway 
operations  in  the  Southwest  which  perhaps  are  not 
encountered  in  other  sections  of  the  country.  The 
territory  is  largely  dependent  upon  agriculture,  cattle 
raising  and  similar  pursuits,  and  is  therefore  subject 
to  crop  failures  which  naturally  result  in  depressing 
trade.  Outside  of  St.  Louis  and  Kansas  City,  there 
are  no  large  industrial  and  manufacturing  centers  to 
produce  any  considerable  heavy  moving  throughout 
the  year.  The  business  is  generally  seasonable,  and 
it  is  necessary  to  provide  facilities  during  four  or  five 
months  of  the  year,  which  must  lie  idle  or  nearly  so 
during  the  remaining  months. 

"Generally  speaking,  the  movement  of  traffic  is 
largely  one  direction,  which  results  in  a  large  empty 
car  mileage  in  the  opposite  direction. 

"It  has  been  difficult  to  increase  either  the  average 
train  load  or  carload  even  with  the  use  of  heavier 
capacity  engines  and  rolling  stock. 

"A  great  deal  of  the  territory  is  subject  to  floods, 
and  much  of  it  is  semi-arid  and  subject  to  droughts." 
(tr.  49-50.) 

Third :  The  financial  condition  of  the  carriers  differs 
greatly. 

A  few  facts  illustrating  the  somewhat  remarkable  dif- 
ferences in  the  financial  condition  of  the  carriers  in  the 
Northwest  and  the  Southwest  justifying  the  considera- 
tion of  these  territories  separately  will  be  here  presented. 


THE  EVIDENCE 


61 


o 

GO 
0) 

- 
as 

as 

cs 
O 

a 

- 


GO 

s 
p 

0 
o 

a 
E 

a> 

GO  J 

£    I 

1  e 

o 

CO 

& 

9 

P 

U 

a 
9 

as   •• 

co    &c 

-a  J 

-tj  > 

03    O 


0> 

— 


OOnjen 

dS     ■ 


2«£ 

O       3 


1  S 

«-Oen 

"S  u  - 

.2  a!o 

■30  g 


•a  fc 


£  t-M 

3  3  0) 
OtOc 


loeaooo  •  ■*©© 

Ht-O*  -tHCMCM 

COencn©  -t-CMO 

en  cocoes  'eeee*i-? 

ene^oo©  ,^ian 

OOOSOO  .COM'* 

©eocNTio  'nVo 


»H       O     • 

M           T        ■ 

co      ^r    • 
en     ©    ' 
t-     o   " 

CM       -W     J 
i-i       f.     • 
©        1-4     • 
fH                  • 
*♦■       •»■     • 

eo    •©    -en 
co    -o    -cm 
t-    •©    •■» 

•4  '©"■  ;»* 

i  -  ■  —    -^ 

oo    ;ao    .<M 

•  eniH     • 
.•*•■*     . 
•COCO     • 
"U5t-     " 

"t-cn 

•  iH          • 

oooia 

OOt-t- 

1-1  US* 


©eccooo 
m  -  —  -- 

*US©* 


t- CM  i-l 

Macro 


t-enenc 

eMeneoi 


)C1O0CO 

•t-USN. 

(MO>5 


ia 

H 

H 

i-^ 

M 

tH 

M 

in 

H 

oo 

o 

en 

CO 

o 

OS 

«»■ 

V* 

■*©e\ieeen©t-©Tt«i3eoinoocn'»"*,eouseMcn 
ooi-<oo*J»o©e>o©i-(CNj©ooiacnio'«'r-it-cMia 

oot— i-c"»«eo©eoi-ieMvco©©eO'»»<eooo©©eM 


ooooooeMi-ieoooeNit-S'O'eccnw're^cofoo* 

-.-ft-f'TJ4^[-J',OHl-tt!lSH(0!Sifin 
MNM!6NONt-OOTfLOMO>HtOt"CS*        i-( 

cm     oo'ih  ©"         en  Vco  e<f  so  oo cnT  i-Tih 

■W  CM  i-CCM  NH 


t-ir5©00t-©COO0'fHS 

eniist-aoeni-ni-icsi©irs 

HMtOt-Ot-ViCCnTf 

co  t-Tooia  co  t— 'cm  oTio  t— 
i-tt-usiri-*©©t-cnc— 
ious*t-©uscN-*HScn 
MNOlVHia      •VCOen 


C-l 

en   • 

M 

eo    • 

o 

eo    • 

t- 

t~- 

t- 

o 

co 

M 

00    • 

t- 

»*    • 

•yj- 

«■»-  • 

m*j>*ust-i-ceot-eocout©©t-i<seooo 
eomeneo©oeoeo©enrt©moo©t-t— 

©«Oi-ICMCO00M©l/5i-<t-ei3IMeOCMU5© 

i-i  t- o  eo  en  oo  co  t-  en  *  ©  co  co  en  ih  t- 1- 

■•S"  us  eo  t- cm  us  en     ©ust—  oooocmoo©us 

t-      cmm*  ia  co  t-  lH  cm  *  *  l-C  oo 


t-ii5eococO'«<i-i©©© 
©i-oocnsMTr^cnco© 
iHi-toooo-^rcNioooo^rcn 


■*eMoo©t-cnir5toeMcn 
enooa>coaienooc-t-oo 
iHioenoo©©eNi».ot-co 


leOrHSMt-OOC-COCqccrt-OOCMt-'^eMt-mCM 

>c-*roo'*!"eowoo<M*eqeoeM!-ieNico©tH©t— 
>t-oot-CM©ft-eMcM©en©rHt.eNicneNioo© 


enm 

©rH 


i-ic»eoc»©N©©©05'*iOTrt-©eNit-coeNi 

eMen©©t-eo©t-oocot-eooONiHenineo© 

i-iiH©enoo©[-ioeMc-ent-©     eqco     iH 


QQ 


Q    QQ 


QQ 


or 


- 
I 
E 

5 

Is 

P. 

♦JaJ 

_C0  « 

u  C  -  v,  c 


<o 


B 


5     Cat  esc 

OOO OOZ 
tC  b£  bO  bO  tVD 
d  cS  c3  d  cj  *j 

—  —  —  —  —  <u 
.c  .cc.es  -- 
UOOOOO 


CO 

:  — 

CO    .0 


^2c 


B      OQgcg^       g 


cd  w  3 
X  CO 

^^c 

«Cfc 


t-i  4)  O 


C     •       -     w 


*r        mo— m*j  •         c  •  o  *  i)  c[i< 

1  S?§*a«8&i^SB5£|§! 


s 


0) 


■  ■ 


— ■—  M  o 
O  O  -  cj 

C  C*j  o 
CC  t.- 

--  o  c 


r2  c    OO^  -      - 


pa 


i8 


CO 


«  »W^dd=3"3 
"S  "r^JeStOMdOOOO 
O     £.*>>  o  c  c2  M  <n  «  »! 


i«J^iJc«(l, 
COW  B3  «  02^' 

.  O  q  o  ™0  so 

a      M' 
4  -*J  4J4J      +J  CO 

iWCOOlScOB 


>flflO 

nco-°3 

*  *  E  », 


^1  cd»^  Hi 


erj 
3  h-X 


hj 


ila  o  X  al 


62 


THE  EVIDENCE 


1  s 

—  . 
>b  - 

■=-=  = 


•OT© 

•exo 
•oooo 
,'cTcc© 

.▼MO 
.MNO 


if  :~ 

■r  =~ 

—  -  - 
O       3 


-- 

-  - 


-  = 


OiiMCCNrcN  -ec 

X  —  Si  L=  t-  t-  C5  pi C*  ',-1 

oc  sc  « ia  pi  oc  i-(  pi  eo  ■ 

ociat-io     eoo     th  . 


CO  n-  OC  pi  «H  CD 

eopneoiot-cTeJ 
cuo-vexi     ea"*1 


WXCCOp*NH 

irTaeac'p-rir'coc'oooi' 

r-  _-  -r =  -r  r :  - 


^:      Zx.  z 


2     222 


3    .  X 

1*  I  ° 


-'-  = 


O      3CxU      - 

!xS  x  =  2—  *  r  its® 

=  ^  =  =  -  =  ■=-  "-- 

.  _  := :  r  •/.  =  -  -  .  .  = 


=  -  -  - 
---- 

'--j-  a 

■==  *i 


E"i 


x 

-_• 
cM  . 
eo  a> 
JS.CC 

;._  : 

c  «  '- 

i   =>» 

"  -  -  - 
-~      - 

-5=r 

w  gg       '-' 


S 

£►> 

°? 

•-  - 

-;-  - 

u 

—  o 
E  ° 


u3 


..eu 

II 
5- 


THE  EVIDENCE  63 

The  total  accumulated  surplus  for  the  Northwestern 
group  aggregated  last  year  $405,000,000,  while  the  total 
for  the  Southwestern  group  aggregated  $40,000,000.  The 
total  for  all  of  the  railroads  named  in  the  Commission's 
order,  exclusive  of  our  Northwestern  group,  showed  an 
accumulated  surplus  last  year  amounting  to  $53,000,000, 
compared  with  $405,000,000  for  the  Northwestern  group, 
alone. 

The  dividends  paid  by  the  Northwestern  group 
amounted  to  $101,279,621,  while  all  of  the  rest  of  the  rail- 
roads named  in  the  Commission's  Suspension  Order  paid 
dividends  amounting  to  $39,688,104. 

The  average  rate  of  net  operating  income  on  property 
investment  in  the  Northwestern  group  amounted  to  5.40% 
in  1914;  in  the  Southwestern  group  it  was  3.8%.  (Com- 
piled from  Powell  No.  2.) 

If  you  exclude  from  the  Northwestern  group  the  Union 
Pacific,  Great  Northern  and  Northern  Pacific,  the  aver- 
age as  shown  by  their  surface  figures  in  the  Northwest- 
ern group  without  any  analysis  or  alterating  was  5.07%.  If 
the  Southwestern  railroads  had  earned  that  much  on  their 
property,  they  would  have  increased  their  net  operating 
income  by  $26,000,000.  In  other  words,  the  Southwest- 
ern lines  would  have  secured  over  twice  the  amount  of 
additional  revenue  that  all  the  railroads  put  together  are 
asking  for  in  this  case,  according  to  the  claims  of  the  car- 
riers. 

The  Southwestern  lines  earned  on  their  capital  stock 
outstanding  last  year  2.57%,  while  the  Northwestern 
group  earned  8.39%.  Excluding  the  Great  Northern, 
Northern  Pacific  and  Union  Pacific,  the  Northwestern 
group  earned  7.59%. 

In  1913,  the  Northwestern  group,  excluding  the  Union 
Pacific,  Northern  Pacific  and  Great  Northern,  earned  on 


64  THE  EVIDENCE 

their  capital  stock  9.25%,  while  the  Southwestern  group 
earned  3.40%. 

While  these  facts  demonstrate  a  very  great  difference 
in  the  financial  conditions  of  the  Northwestern  and  South- 
western railroads,  yet  we  do  not  attempt  to  say  that  there 
is  any  proof  here  that  the  Southwestern  lines  have  proved 
their  case.  Such  a  conclusion  should  not  be  reached  with- 
out a  more  thorough  investigation  than  we  have  been  able 
to  give.  We  have  only  stated  the  surface  figures  with- 
out any  critical  analysis  for  those  roads. 

There  are  strong  reasons  why  the  state  of  Kansas 
should  be  included  with  the  Northwestern  group  of  states, 
instead  of  with  the  Southwestern  group.  Her  produc- 
tion of  grain  and  her  farming  are  very  analogous  to  the 
state  of  Nebraska.  We  hardly  think,  however,  that  the 
cross  country  check  extends  up  and  down  for  a  distance 
of  400  or  500  miles ;  in  fact,  advances  in  grain  rates  have 
occasionally  been  made  in  smaller  territories  than  that. 

If  it  were  not  for  the  fact  that  Kansas  is  served  by  rail- 
roads that  do  not  go  up  into  the  Northwestern  territory 
at  all,  or  practically  not  at  all,  such  as  the  Missouri  Pa- 
cific, Frisco,  Missouri,  Kansas  &  Texas  and  St. 
Louis  Southwestern,  it  would  be  well  to  place  Kan- 
sas in  the  Northwestern  group.  We  have  made 
some  analysis  of  conditions,  including  Kansas  and 
Missouri  as  a  part  of  the  Western  Trunk  Line  terri- 
tory in  the  Northwestern  group,  but  if  those  two  states 
are  added,  you  will  include  territory  that  is  served  by 
mileage  of  the  weaker  Southwestern  railroads,  like 
those  we  have  named.  A  very  natural  boundary  line  lies 
between  the  states  of  Missouri  and  Iowa,  Kansas  and  Ne- 
braska; yet  there  is  strong  reason  why  Missouri  and 
Kansas  should  be  included  in  the  Northwestern  group. 
For  that  reason  we  present  alternating  figures  frequent- 
ly. There  is  no  question  whatever  but  what  the  North- 
western group  of  railroads  belongs  in  an  entirely  differ- 


THE  EVIDENCE  65 

ent  group  from  the  Southwestern  railroads.  There  are 
many  reasons  why  the  state  of  Kansas  should  be  included 
in  the  Northwestern  group. 

CONDITIONS  IN  THE  SOUTHWEST. 

In  addition  to  the  foregoing  extract  from  the  testimony 
of  Mr.  Schaff,  it  may  be  stated  in  regard  to  conditions  in 
the  Southwest,  that  the  companies  seem  to  have  been  or- 
ganized by  a  different  group  of  financiers,  and  while  their 
apparent  returns  may  be  small,  it  is  very  probable  that 
if  a  proper  investigation  were  made  into  their  traffic  con- 
ditions, and  into  the  value  of  their  properties,  the  result 
would  be  different. 

Many  miles  of  new  railroads  have  been  built  through- 
out the  southwest  by  private  capital  donated  to  the  car- 
riers in  the  form  of  special  taxes  and  subsidies,  and  by 
exemption  from  taxation.  In  the  state  of  Louisiana,  the 
Constitution  of  1898  exempted  railroads  built  prior  to 
January  1, 1904,  from  taxation  for  a  period  of  ten  years. 
By  an  amendment  to  the  Constitution  in  1904,  this  exemp- 
tion was  extended  for  a  period  of  ten  years  to  all  new 
lines  of  railroads  built  from  January  1,  1904,  to  January 
1,  1910,  so  that  it  will  be  1920  before  all  of  the  new  lines 
of  railroads  in  the  state  of  Louisiana  built  prior  to  1910 
will  begin  to  pay  taxes. 

Of  course,  from  year  to  year,  some  of  this  mileage  is 
removed  from  the  exemption  period.  In  the  period  from 
1898  to  1910  there  were  built  in  the  state  of  Louisiana 
2,756  miles  of  new  railroad,  which  paid,  or  will  pay,  no 
taxes  for  a  period  of  ten  years.  Much  of  this  new  mile- 
age received  subsidies  from  the  towns,  cities  and  parishes 
(counties),  through  which  the  railroad  was  built.  In  ad- 
dition to  this,  the  railroads  have  paid  out  of  their  earn- 
ings for  much  of  the  new  mileage  built  in  the  state  of 
Louisiana  in  the  period  of  ten  years.  This  is  especially 
true  of  the  Texas  &  Pacific  and   the    Southern   Pacific 


66  THE  EVIDENCE 

lines.    Other  states  in  the  Southwest  have  had  the  same 
experience. 

The  present  value  of  railroads  may  appear  greater 
than  the  public  expected,  but  the  public  itself  has  put  its 
money  into  these  railroads  and  built  itself  much  of  the 
new  mileage  in  the  manner  indicated. 

Our  Committee  would  have  liked  to  make  a  careful 
analysis  of  the  Southwestern  lines,  but  time  absolutely 
prevented. 

We  have  undertaken  to  cover  the  Northwestern  group 
of  railroads  somewhat  extensively,  and  have  presented  to 
you  the  surface  figures  for  the  Southwestern  railroads 
without  adequate  check  or  analysis.  We  have  under- 
taken to  give  somewhat  greater  consideration  to  the 
Santa  Fe  and  one  or  two  other  representative  lines  in  the 
southwest  than  to  the  other  lines  as  a  whole  in  that  terri- 
tory. 

The  record  shows  that  while  some  of  these  companies 
have  not  been  taken  care  of  adequately  in  the  past,  that 
they  are  reaching  a  better  plane  in  recent  years.  The 
following  extract  from  the  testimony  of  Mr.  Bush  illus- 
trates this  situation. 

Mr.  Bush  candidly  admitted  that  his  railroad  was  bet- 
ter, both  physically  and  financially,  than  in  1910,  as  shown 
by  the  following: 

"Mr.  Thorne:  What  was  the  year  you  were  over 
the  road  prior  to  your  becoming  president! 

"Mr.  Bush:  I  should  think  about — it  might  have 
been  in  1909  I  went  through  to  the  coast  and  went 
over  the  Missouri  Pacific. 

1 '  Mr.  Thorne :  Would  you  state  to  the  Commission 
the  character  of  the  road  at  that  time  so  far  as  road- 
bed and  equipment  are  concerned? 

"Mr.  Bush:  It  was  in,  you  might  say,  poor  con- 
dition, especially  the  roadbed.  It  had  a  great  deal 
of  light  rail  and  very  little  ballast,  and  it  was  not 
anywhere  normal,  you  know;  it  would  not  be  what 


THE  EVIDENCE  67 

you  would  call  anywhere  near  standard  track.  I 
could  not  speak  as  to  the  equipment;  I  did  not  ob- 
serve it  closely. 

1  *  Mr.  Thome :  What  was  the  cause  of  the  condi- 
tion which  you  describe?  Was  it  delayed  mainten- 
ance? 

"Mr.  Bush:  Yes,  it  was  delayed  and  deferred 
maintenance.  They  had  not  applied  the  heavy  rail, 
and  they  were  deficient  in  ties  and  ballast. 

"Mr.  Thome:  Would  you  describe  the  condition 
of  that  property  as  it  is  now,  generally? 

"Mr.  Bush :  Well,  on  what  you  call  the  main  lines 
of  the  Missouri  Pacific  the  85-pound  rail  is  the  stand- 
ard. The  rail  we  are  laying  now  is  90-pound  and  I 
think  all  of  the  main  lines  have  had  at  least  six  inches 
or  more  of  ballast  applied,  and  the  banks  have  been 
widened  on  what  we  call  our  main  lines  and  our  sec- 
ondary lines. 

"Mr.  Thome:  What  is  your  judgment  as  to 
whether  you  are  keeping  the  equipment  up  better 
than  it  was  in  1910,  before  you  became  president? 

"Mr.  Bush:  Oh,  well,  I  would  have  to  keep  it  up 
better  than  it  was  kept  up  at  that  time  or  else  I  would 
not  have  it  in  service. 

"Mr.  Thorne:  As  a  matter  of  fact  you  are,  are 
you  not? 

"Mr.  Bush:  Oh,  yes,  sir;  spending,  I  suppose,  a 
million  dollars  a  year  more  on  maintenance  of  equip- 
ment than  we  were  at  that  time.     (tr.  447-8-9.) 

"Mr.  Thorne :  Just  frankly  now,  is  it  a  fair  state- 
ment to  say  that  in  1914  and  recently  you  are  main- 
taining the  Missouri  Pacific  at  a  higher  standard 
than  in  1910  and  those  years  ? 

"Mr.  Bush:    That  is  correct. 

"Mr.  Thorne:  In  regard  to  the  improving  and 
the  additions  to  your  ballast,  about  how  many  years, 
in  your  judgment,  or  do  you  know,  perhaps  you  do 
not  know,  the  number  of  years  they  deferred  the 
placing  of  new  ballast  and  reballasting  with  rock  or 
gravel  back  of  1910? 

"Mr.  Bush:  I  could  not  say  as  to  that.  I  do  not 
think  there  ever  was  a  regular  ballast  program  on 


68  THE  EVIDENCE 

the  Missouri  Pacific  up  to  the  time  I  came  there. 

1 '  Mr.  Thorne :    Probably  delayed  several  years  f 

"Mr.  Bush:  Well,  I  think  they  tried  to  keep  the 
road  going,  that  was  the  amount  of  it.  I  do  not  think 
they  had  a  regular  laid  out  plan  of  improvement  or 
betterment. 

1  *  Mr.  Thorne :  Is  it  not  true  that  has  had  a  great 
deal  to  do  with  the  Missouri  Pacific's  lack  of  success? 

1  *  Mr.  Bush :    Well,  I  presume  it  has. 

' *  Mr.  Thorne :  You  have  inaugurated  a  new  policy 
in  handling  that  property,  in  trying  to  build  it  up 
into  a  more  efficient  property? 

"Mr.  Bush:  Well,  I  am  certainly  trying  to  get  a 
road  there  that  will  meet  the  requirements  of  the 
shippers. 

"Mr.  Thorne:  Do  you  know  what  the  gross  earn- 
ings of  your  property  were  in  1910 ! 

"Mr.  Bush:    $53,000,000. 

"Mr.  Thorne:    What  were  they  in  1914? 

"Mr.  Bush:    $59,000,000. 

"Mr.  Thorne :    An  increase  of  about  how  much? 

"Mr.  Bush:    About  $7,000,000. 

1 '  Mr.  Thorne :    What  was  the  net  in  1910  ? 

"Mr.  Bush:    $15,000,000. 

1  *  Mr.  Thorne :  What  is  the  net  operating  revenue 
for  1914? 

"Mr.  Bush:    $16,457,000. 

"Mr.  Thorne:  So  that,  in  spite  of  maintaining 
your  property  at  a  higher  standard,  you  have  also 
had  a  million  and  a  half  greater  net  earnings  ? 

"Mr.  Bush:    Yes,  sir."    (tr.  454-5). 

AMOUNT  INVOLVED. 

The  representatives  of  the  carriers  claim  that  the  pres- 
ent advances  only  aggregate  $10,000,000  (tr.  10).  Fur- 
ther the  counsel  for  the  carriers  state  that  the  movement 
has  been  practically  completed.  As  to  this  fact,  the  fol- 
lowing was  stated  of  record : 

"Mr.  Walter:    Can  you  tell  us  whether  all  the 


THE  EVIDENCE  69 

tariffs  have  now  been  filed  that  are  a  part  of  this 
general  western  advance?  I  do  not  mean  the  case 
here,  but  initiated  at  the  same  time  as  the  tariffs  un- 
der suspension  in  this  case. 

"Mr.  Haile:  Why,  in  the  Southwest,  I  think,  yes. 
I  am  not  prepared  to  answer  as  to  the  Northwest, 
where  our  interest  is  little  or  nothing. 

"Mr.  Wright:  I  think  they  practically  are,  Mr. 
Walter. 

' '  Mr.  Walter :  Can  you  state  that  formally  on  the 
record,  Mr.  Wright? 

"Mr.  Wright:  Yes;  they  have  been  practically, 
except  there  may  be  some  minor  readjustments." 
(tr.  5833.) 

Mr.  Wright  was  asked  to  produce  the  witnesses  who 
made  these  computations.  They  were  never  produced. 
It  was  promised  repeatedly  that  Mr.  Boyd  would  later 
take  the  stand  and  prove  up  the  details.    He  never  did  so. 

In  this  connection  it  may  be  well  to  note  that  the  total 
freight  revenues  of  the  carriers,  respondents  in  this  case, 
aggregated  last  year  approximately  $700,000,000. 

But  let  us  accept  Mr.  Wright 's  statement  as  absolutely 
accurate;  then  we  find  the  advances  here  proposed 
amount  to  approximately  V/2%  of  their  freight  rev- 
enue. They  proposed  to  secure  $10,000,000  annually  by 
making  advances  several  times  as  great  on  certain  select- 
ed commodities  in  certain  selected  sections  of  the  ter- 
ritories served  by  these  railroads ;  the  great  bulk  of  the 
advances  being  specifically  limited  to  that  territory 
between  the  Missouri  River  and  Chicago ;  it  being  claimed 
by  the  carriers  that  no  line  operating  west  of  the  Missou- 
ri River  secures  any  substantial  division  in  the  earnings, 
thereby  throwing  the  burden  of  the  advance  on  the  traffic 
east  of  the  Missouri  River.  The  carriers  propose 
advances  ranging  from  7%  upward  on  different  articles. 
If  it  be  true  that  these  carriers  are  in  need  of  additional 
revenue,  what  justification  have  they  for  crowding  it 
all  on  this  selected  part  of  their  traffic.       This  action 


70  THE  EVIDENCE 

cannot  be  justified  in  reason  unless  that  traffic  is  not 
bearing  its  fair  share  of  the  transportation  burden.  Had 
the  advances  been  spread  out  over  50%  of  the  traffic  as 
in  the  Southwestern  Case  of  1910  (Texas  R.  R.  Commis- 
sion v.  A.,  T.  &  S.  F.,  20  I.  C.  C.  463),  there  would  have 
been  more  justification  for  the  action,  but  when  an 
advance  of  Xy^fo  is  proposed,  and  some  people  are 
compelled  to  pay  an  advance  several  times  that  amount, 
we  are  justified  in  demanding  facts  to  support  such 
discriminatory  action.  Advances  proposed  in  the  East- 
ern case  and  Southwestern  Cases  of  1910,  and  the 
advances  proposed  in  the  Eastern  Case  of  1914  were 
more  general  in  character.  If  what  the  railroads  here 
claim  be  true,  that  accentuates  the  necessity  for  a 
justification  or  reason  for  the  particular  selection  which 
the  carriers  have  adopted. 

A  request  at  the  hands  of  this  Commission  for  $10,- 
000,000  from  carriers  whose  gross  earnings  last  year 
were  $700,000,000,  is  not  a  legitimate  request.  Net  rev- 
enues have  fluctuated  much  more  than  that  from  year  to 
year  in  this  territory.  There  are  no  just  grounds  for 
concluding  that  their  net  income  will  not  continue  to  do 
this  in  the  future  as  it  has  in  the  past.  For  instance,  in 
the  Southwestern  and  Northwestern  groups  combined  in 
1898,  in  that  one  year  there  was  an  increase  of  over  $24,- 
000,000,  both  in  net  operating  income  and  net  corporate 
income.  Again  in  1901,  there  was  an  increase  of  $14,- 
000,000  in  net  operating  income  and  $7,000,000  in  net 
corporate  income.  In  1906,  there  was  an  increase  over 
the  preceding  year  of  $26,000,000  in  net  operating  income 
and  $27,000,000  in  net  corporate  income.  In  1907  there 
was  an  increase  in  net  operating  income  of  $20,000,000 
and  $26,000,000  in  net  corporate  income.  In  1913  there 
was  an  increase  in  net  operating  income  of  $45,000,000 
over  the  preceding  year,  and  in  the  net  corporate  income, 
of  $40,000,000. 


THE  EVIDENCE  71 

It  is  very  apparent  that  a  mere  $10,000,000  increase  for 
one  year  can  easily  be  anticipated.  We  must  not  presume 
that  similar  developments  shall  not  occur  in  the  future 
as  have  in  the  past. 

It  is  not  for  $10,000,000  that  Mr.  Wright  and  his  asso- 
ciates are  making  this  contest.  These  companies  are 
seeking  an  advance  in  their  passenger  fares  that  will 
probably  approximate  20%  if  they  are  successful  in 
forcing  it  through  on  state  and  interstate  business. 

To  lay  a  foundation  on  that  basis,  they  seek  to  prove 
inadequacy  of  revenues  as  a  whole.  The  passenger  rev- 
enues last  year  were  approximately  $244,000,000. 

A  20%  increase  (assuming  two-fifths  will  travel  on 
mileage  books)  will  yield  $48,800,000. 

In  addition  to  these  we  have  increases  being  proposed 
daily  by  the  carriers.  There  is  now  pending  before  the 
Commission  an  advance,  from  the  far  northwest,  on  live 
stock  which  has  been  pending  for  over  one  year.  Other 
advances  on  concentration  of  dairy  food  products, 
elimination  of  certain  privileges,  stoppage  in  transit,  and 
charges  for  demurrage  services,  etc.  All  of  these  will 
bring  more  revenues  to  the  carriers. 

If  what  these  railroad  companies  are  really  seeking  is 
an  additional  $50,000,000  in  their  net  income,  if  they  are 
successful  and  that  $50,000,000  is  divided  between  the 
Northwestern  and  Southwestern  lines,  in  proportion  to 
their  present  net  corporate  income,  it  will  make  this 
Northwestern  group  of  railroads  earn  over  10%  on  their 
capital.  The  market  prices  of  their  bonds  are  today 
close  to  par.  The  market  prices  of  their  stocks,  in  that 
event,  will  soar  higher  than  they  are  today;  instead  of 
averaging  125,  as  they  do  today,  they  will  be  much  above 
150. 


72  THE  EVIDENCE 


COST  OF  RAILWAY  SUPPLIES. 

In  the  1910  Advanced  Rate  Case,  the  Commission 
found,  concerning  the  cost  of  railway  supplies,  as  follows : 

* '  It  was  assumed  at  the  initial  stage  of  this  investi- 
gation that  railroad  materials  and  supplies  had 
greatly  advanced  in  price  within  the  past  few  years. 
Investigation  was  accordingly  had  into  this  ques- 
tion, and  to  our  surprise,  it  may  be  said,  it  was  dis- 
covered through  figures  furnished  by  the  carriers 
and  their  admissions  that,  with  the  exception  of  fuel 
and  ties,  railway  supplies  and  materials  are  today 
costing  the  carriers  less  on  the  average  than  in  any 
of  the  past  ten  years."  (Western  Advanced  Rate 
Case,  20  I.  C.  C,  367,  368.) 

"As  to  the  increased  cost  in  ties,  while  the  stand- 
ard white  oak  tie  costs  5  or  10  cents  more,  the  gen- 
eral increase  in  this  expenditure  is  almost  negligible, 
it  being  estimated  from  the  reports  furnished  by  the 
carriers  that  it  will  increase  the  cost  of  maintenance 
less  than  $50  per  mile  of  road  per  year."    (Id.  369.) 

The  analysis  of  cost  of  supplies  made  in  this  case  dem- 
onstrates the  same  tendencies  that  the  Commission  found 
existing  in  1910. 

Steel  rails  is  the  most  important  item,  and,  as  all  know, 
and  the  record  shows,  these  prices  have  remained  prac- 
tically constant  for  many  years. 

Further,  we  all  know,  and  the  exhibits  in  this  case 
show,  that  the  density  of  traffic  has  increased  enormously 
during  recent  years  compared  with  previous  times.  Conse- 
quently the  cost  of  rails  per  ton  mile  has  shown  a  sub- 
stantial decline. 

Next  in  importance  to  steel  rails,  are  iron  and  steel 
products.  The  Wall  Street  Journal  is  responsible  for  the 
statement  that  thirty  per  cent  of  the  iron  and  steel  prod- 
ucts of  the  country  are  consumed  by  the  railroads.  (Wall 


THE  EVIDENCE 


73 


Street  Journal,  January  26,  1914,  p.  7,  Ellis  Exhibit  No. 
1,  P.  3.) 

There  is  a  constant  fluctuation  frdm  year  to  year  in 
the  prices  of  supplies.  This  is  especially  noticeable  with 
reference  to  iron  and  steel  products.  In  June  of  1913, 
people  would  have  been  led  to  believe,  as  did  the  Secre- 
tary of  the  Iron  Institute,  that  prices  were  going  up; 


74  THE  EVIDENCE 

but  future  events  demonstrated  that  that  was  purely  a 
temporary  phase  of  the  situation.  The  steady  downward 
trend  on  the  principal  iron  and  steel  products,  since 
1900,  is  demonstrated  by  the  accompanying  chart,  which 
covers  steel  bars,  steel  rails,  Bessemer  ingots,  Bessemer 
pig,  local  No.  2  foundry,  southern  No.  2  foundry,  basic 
pig,  steel  tank  and  wire  nails. 

The  Norton  chart,  being  the  last  page  of  Norton  Ex- 
hibit No.  1,  includes  a  miscellaneous  list  of  railway  sup- 
plies. This  chart  does  not  show  the  downward  trend  that 
has  occurred  on  iron  and  steel  products ;  but  it  indicates 
an  advance  on  railway  supplies  up  to  1907.  Since  then, 
however,  there  has  been  a  decline,  with  fluctuations,  on 
average  prices,  1914  being  at  the  lowest  plane  since  1907. 
This  chart  given  in  the  exhibit,  covers  the  prices  on 
the  following  supplies :  augers,  axes,  bar  iron,  barb  wire, 
butts,  chisels,  ingot,  copper  sheet,  copper  wire,  door 
knobs,  files,  hammers,  lead  pig,  lead  pipe,  locks,  nails, 
pig  iron,  planes,  quicksilver,  crosscut  saws,  hand  saws, 
shovels,  steel  billets,  rails,  tin  pig,  wood  screws,  zinc 
sheet,  etc. 

The  cost  of  ties,  untreated,  has  probably  risen  in  price. 
However,  the  carriers  are  putting  in  a  great  many  more 
treated  ties  in  recent  years  than  during  the  earlier  period. 
It  is  estimated  that  these  ties  will  be  much  longer  lived 
than  the  old  wooden  ties.  It  is  difficult  as  yet,  many  en- 
gineers state,  to  determine  how  much  additional  life 
these  ties  will  have.  The  life  of  a  tie  is  variously  esti- 
mated by  American  railways  from  7  to  12  years.  It  has 
been  stated  that  beech  ties  impregnated  with  12  pounds 
of  oil  per  cu.  ft.  have  lasted  30  years  on  the  Eastern  rail- 
ways of  France.  The  French  State  Eailway  states  the 
life  of  creosoted  ties  to  be  from  15  to  30  years.  It  is  said 
that  in  the  bridge  of  L.  &  N.  E.  E.,  over  the  mouth  of 
the  Pasagoula  river,  there  are  piles  which  have  been 
treated  with  20  lbs.  of  oil  per  cu.  ft.,  which  have  been  in 


THE  EVIDENCE  75 

the  structure  for  28  years,  and  will  be  good  for  many- 
years  to  come.  Uncreosoted  piles  V/2  ft.  in  diameter,  in 
this  place,  have  been  cut  off  by  the  teredo  in  a  single 
year.    (Ellis  Exhibit  No.  3,  pp.  33  &  34.) 

Considering  the  greater  life  of  the  tie,  it  is  difficult  to 
determine  whether  the  cost  of  this  supply,  fairly  charge- 
able to  any  given  year's  traffic,  or  any  given  amount  of 
tonnage,  has  increased  or  decreased. 

LABOR  CHARGES. 

It  is  claimed  that  labor  is  costing  the  railroads  more 
money,  and  this  is  urged  as  a  justification  for  increases 
in  freight  rates. 

It  is  true  that  most  railroad  employes  are  receiving 
more  pay  per  day  in  recent  years  than  in  earlier  years. 

Mr.  Wettling  produced  two  tables,  attempting  to  show 
the  increase  in  the  amount  of  money  paid  to  labor  on 
western  railroads.  (Wettling  Vol.  1,  Exhibit  15  and 
Exhibit  4.) 

This  exhibit  shows  a  very  large  increase  of  the  amount 
paid  labor  in  dollars  and  cents;  further  it  shows  a  sub- 
stantial increase  in  the  wage  paid  per  man. 

Granting  that  these  facts  are  correctly  stated,  it  now 
becomes  necessary  to  consider  what  conclusions  can  be 
arrived  at  from  that  table.  It  is  impossible  to  determine 
from  those  figures  presented  by  Mr.  Wettling  whether 
it  is  costing  more  or  less  per  ton  hauled  a  mile,  or  per 
dollar  earned,  in  recent  years  than  in  former  years,  for 
the  following  reasons : 

First :  No  account  is  taken  in  the  said  exhibits  for  the 
additional  tonnage  handled. 

Second :  The  labor  charges  there  summarized  on  those 
exhibits  are  not  confined  to  railroad  operation,  but  they 
include  railway  construction  of  betterments  and  improve- 
ments. 


76  THE  EVIDENCE 

If  the  carriers  should  chance  to  do  a  larger  amount  of 
construction  during  the  latter  period  than  during  the 
former  period,  the  labor  charges  would  consequently 
amount  to  a  larger  sum  of  money  during  the  latter  pe- 
riod than  during  the  former  period,  and  might  make  a 
larger  labor  cost  per  dollar  earned,  or  per  ton  hauled  a 
mile. 

Such  a  conclusion,  of  course,  would  be  fallacious.  In- 
cluding in  this  labor  charge  the  cost  of  labor  devoted  to 
the  construction  of  betterments  and  improvements  com- 
pletely invalidates  the  comparison. 

That  we  are  correct  in  the  proposition  that  labor,  con- 
nected with  improvements  of  property,  can  be  charged  to 
operating  expenses,  we  cite  the  following  extracts  from 
the  record 

1 '  Mr.  Thorne :  That  account  in  the  I.  C.  C.  reports 
makes  no  distinction  between  labor  that  is  used  in 
operating  a  railroad  and  labor  that  might  be  used  in 
new  construction  of  additions  and  betterments,  does 
it? 

1 '  Mr.  Wettling :    It  does  not.    ( tr.  784. ) 

"Mr.  Thorne :  That  comparison  is  taken  from  the 
ordinary  forms,  of  course,  of  the  reports  to  the  Com- 
mission? 

"Mr.  Wettling:    Yes,  sir. 

"Mr.  Thorne :  There  you  do  not  have  any  division 
as  between  the  labor  that  is  used  for  betterments  and 
improvements,  or  that  which  is  used  in  ordinary 
maintenance  ? 

"Mr.  Wettling:    No,  not  as  to  improvements  . 

"Mr.  Thorne:  You  would  have  to  make  a  separa- 
tion before  you  could  tell  whether  the  cost  per  unit 
of  traffic,  cost  of  maintenance  per  ton  mile,  has  in- 
creased or  decreased,  would  you  not? 

"Mr.  Wettling:  Oh,  yes,  although  that  might  be 
done  in  a  general  way  by  comparing  the  additions 
and  betterments  activities  of  one  year  with  another. 

"Mr.  Thorne:    Then  could  you  suggest  a  method 


THE  EVIDENCE  77 

that  would  be  fairly  reasonable?  How  would  you 
assume  what  portion  of  labor  has  gone  into  mainten- 
ance because  of  additions  and  betterments?  How 
would  you  approximate  it  ? 

"Mr.  Wettling:  I  would  make  a  study  to  find  out 
about  what  proportion  of  additions  and  betterments 
would  be  represented  by  labor  costs  in  some  one  year 
and  make  the  proportionate  deduction  based  on  such 
a  study  as  that  and  assume  it  held  so  on  the  aver- 
age."   (tr.  4113-4114.) 

Considering  the  enormous  sums  in  connection  with  bet- 
terments and  improvements  that  can  be  included  in  such 
labor  charges,  as  are  presented  in  the  compilation  of- 
fered by  Mr.  Wettling,  if  a  railroad  company  desires  to 
raise  the  standard  of  its  track  throughout  its  entire  sys- 
tem, removing  old  streaks  of  rust  that  have  been  stretched 
along  the  ground  for  a  generation,  tearing  up  old  rails, 
putting  heavier  rails  on  every  foot  of  track  on  the  entire 
property,  the  total  cost  of  picking  up  the  old  rails,  tear- 
ing out  the  spikes,  gathering  the  rails  up,  disposing  of 
them,  distributing  the  new  rails,  laying  of  new  rails,  to- 
gether with  all  frogs,  switches,  ties,  plates,  protecting 
traffic  in  the  meantime  while  this  reconstruction  is  in 
progress,  putting  in  cement  bridges  in  place  of 
wooden  bridges,  expensive  tunnels,  lining  tunnels  with 
concrete,  putting  in  heavier  expensive  trestles,  overhead 
crossings,  etc.,  also  a  large  part  of  the  labor  charges  run- 
ning into  millions,  would  be  charged  to  operating  ex- 
penses, and  made  a  part  of  the  figures  Mr.  Wettling  pre- 
sents. 

Wettling  Vol.  1,  Exhibit  15,  shows  the  increase  in  labor, 
number  of  days  worked,  amount  of  compensation  and 
rate  per  day,  also  a  comparison  of  subsequent  years  with 
1900.  The  first  two  items  have  no  significance  as  they 
take  no  account  of  the  very  large  increase  in  mileage  and 
of  traffic  handled.  The  comparison,  therefore,  must  be 
of  the  increase  in  the  average  rate  per  day  and  that  should 


78  THE  EVIDENCE 

then  be  compared  to  the  traffic  handled  or  the  dollars 
earned. 

Chambers  Vol.  2,  Exhibit  4,  page  5,  shows  that  the  in- 
crease in  labor  for  maintenance  of  way  and  structures 
per  man  per  day  on  the  Chicago,  Rock  Island  &  Pacific 
Railway  was  5.52%,  when  comparing  period  1905  to  1907 
inclusive,  and  4.24%  when  comparing  period  1904  to  1907 
inclusive,  with  period  1908  to  1914  inclusive.  The  reason 
for  going  back  to  1904  only,  as  explained  in  his  testimony, 
was  on  account  of  the  very  large  increase  in  mileage 
taken  in  by  this  road  in  1904. 

This  comparison  of  labor  in  maintenance  of  way  and 
structures  was  not  made  for  any  other  road,  for  the  rea- 
son that  the  only  other  road  of  which  an  analysis  was 
made,  was  the  Chicago  &  North  Western,  and  the  labor 
factor  did  not  enter  into  the  compilation  made. 

Chambers  Vol.  2,  Exhibit  4,  page  1,  shows  that  the  in- 
crease in  labor  for  maintenance  of  equipment  per  man 
per  day  on  the  Chicago  &  North  Western  was  5.88%, 
when  comparing  the  period  1901  to  1907  inclusive,  with 
the  period  1908  to  1914  inclusive.  The  same  exhibit,  page 
3,  shows  the  increase  per  man  per  day  on  the  Chicago, 
Rock  Island  &  Pacific  Railway  was  14.85%,  comparing 
the  period  1901  to  1907  inclusive,  with  the  period  1908  to 
1914  inclusive.  The  increase  on  the  Chicago,  Rock  Island 
&  Pacific  Railway  was  considerably  higher  than  on  the 
Chicago  &  North  Western,  although  the  average  wages 
per  day  in  the  period  1908  to  1914  inclusive,  was  less,  be- 
ing $2.32  per  day  on  the  Chicago,  Rock  Island  &  Pacific 
as  against  $2.34  on  the  Chicago  &  North  Western,  but  the 
average  rate  per  day  in  the  first  period  was  much  lower 
on  the  Chicago,  Rock  Island  &  Pacific  than  the  Chicago  & 
North  Western,  making  the  increase  larger. 

The  increase  in  machinist  labor  was  greater  than  the 
other  labor  for  maintenance  of  equipment,  which  might 


THE  EVIDENCE  79 

make  the  amount  chargeable  to  repairs  of  locomotives 
slightly  more  and  repairs  of  freight  and  passenger  cars 
less.  Machinist  labor  being  only  about  10%  of  the  labor 
for  maintenance  of  equipment  and  the  repairs  of  locomo- 
tives being  almost  exactly  the  same  as  repairs  of  passen- 
ger and  freight  train  cars,  the  use  of  the  average  per  day 
would  not  materially  affect  the  total  of  maintenance  of 
equipment. 

While  the  average  wages  per  day  for  maintenance  have 
slightly  increased  the  second  period  over  the  first,  in 
order  to  determine  whether  labor  is  costing  more  or  less, 
consideration  must  be  given  to  the  results  obtained  from 
a  day's  labor,  and  the  cost  of  labor  out  of  a  dollar  earned. 
This  is  readily  determinable  as  far  as  "Transportation 
Expenses"  are  concerned,  but  it  is  impossible  to  obtain 
for  maintenance  until  adjustment  is  made  for  additions 
and  betterments  charged  to  operating  expenses  and  for 
raising  the  standard  of  the  property. 

Mr.  Wettling  claimed  labor  had  increased  more  in 
transportation  than  any  other  department;  that  may  be 
true  per  man,  but  when  you  come  to  apply  it  to  the  traffic 
handled  you  find  labor  costs  have  declined. 

COST  OF  LABOR. 

"Mr.  Thome:  Have  you  filed  any  statement 
showing  the  cost  of  labor  per  ton  mile? 

' '  Mr.  Felton :  Labor  in  connection  with  transpor- 
tation would  show  decreases,  because  of  the  increased 
train  loading,  sir. ' ' 

TRAIN  LOADING. 

"Mr.  Thorne:  About  how  much  has  your  train 
loading,  the  number  of  ton  miles,  increased  since 
1910? 

"Mr.  Felton :  In  1910  our  average  tons  of  revenue 
freight  per  train  mile  were  302;  in  1914,  474.75. 
(tr.  207.) 


80  THE  EVIDENCE 


RETURN  ON  NEW  CAPITAL. 

The  carriers  have  occasionally  argued  that  they  were 
unable  to  earn  an  adequate  return  upon  new  capital, 
and  consequently  this  makes  their  securities  unattractive 
to  the  investor. 

In  order  to  test  the  validity  of  this  proposition,  we 
have  compiled  the  following  table: 


THE  EVIDENCE 


81 


h 

9 

H 
CQ 

- 
> 
Z 

— 

H 

eJ 
H 

K 

o 

a 
g 

a 
< 

E 
o 


c 

■ 

o 

h 

• 

ON<Ot»HOOOOSOOHt»*lO 

V 

e»«M^H(MTHe>»eNi'^<(MiHe7seoo> 

WOSllNIOtOHOmOOLOOOO 

w^^t-ec^eja«D«©e»ar'*t-r 

to  oo  w"  h  m  »  (»  o  >3  e»  h"  o  co 

oiojiioHooNoor-HMOitn 

(e*HHHOOl»»'*MH 

3  », 

-4->        09 

0  a 

1  o 

M 

o 
n 

03 

•    H 
P  GQ 

4->  «•<-> 
0>  C  « 

«  O  l-> 

m«  » 

*  C-u 

I*  Ooo 
«  fci  3 

^i«H(DtO<<<OOMOOOOO 

esioo<o<0'^,'^,eoo5eoooe7>'^'t- 

(OOlOOOt-NOMiat-OSMlO 
(O  ^N  *  O  fl  W  M^OO^O^t^t^N 

HHaOOMt>(OlOC4COHMCO 
tH  r-l 

9  P 

Oh   O 
°> 

3  « 

H  Hi 

♦J 

a 
■ 
o 

h 

■ 
Oh 

t-<oo>T-ic<icNoot"-oot~t-iO'*»« 
us<»cooeO'<#ioocNi'«ijej>cooo 

d  »  in  u)  1a  ■*'  c-i  m  o  ■*  ■*  cc  •*' 

II 

gs 

H 
GQ 

•4-» 

3  ®£ 

(-  ft  CO 

O  O  D 

H 

«g^U5Ht"WOO*^NOOM 

M05io»w«tei^e)>t^^t^eo 
o  ^  n  <e  t»  <e  q  w  n  h  ^i  09  » 

t-aiOt-MO»t"Ht-r(M* 

Hoqaioiotot-wio^MN 

< 
H 
3 

g 

i—i 

®  S  E 

2  d  O 
CO  h  o 

CO  0)  c 

Miowtcioc-jojtO'lifflooaiw 

l.^  1-  O  lO  t-  'J  t-  tl  C!  <c  to  lO  oo 

eoe»»TH^oeftc^e>«equ9eqrH 
«eoeNTcooo«o'iHooeNrrH"<i<'cNrt^' 

teajtsoiofoteTftct-ooNt- 
*  «  q»  io  on  «  us  *  to  woo 
i>  VNooe»oc<fMoo"iaoi»H 

OHNW*l0»t»00e6OHN 
OOOOOOOOOOrHrHi-l 
CJi  CTa  C7>  CJi  Oi  OS  03  O  C7>  OS  C7>  C7>  0> 
»Hi-ti-tT-tT-tT-tTHrHTHiHTMrHTH 

eoeoeococoeoeoeocoeocoeoeo 

iHiHtHT-trHiHrHTH»HrHrHi-ti-t 
Qfe  CTi  0t  CJ>  Oi  OS  OS  OS  OS  OS  OS  OS  OS 

CQ 

4 

r  d 
r  <* 

rig 
d  •: 

..a 

Oca 

°3gq 

0^ 
£S 


a 

W 

o 

4 

9 

S 

i 

.. 

o 

a 

o 

.=5 

*-> 

ai 

(- 

5 

en 
en 

CD 

hi 

C 

ftO 

a 

o 

_- 

U 

1 

82  THE  EVIDENCE 

This  table  shows  how  much  the  Northwestern  group  of 
railroads  had  increased  their  property  in  1913  over  each 
one  of  the  preceding  years  in  the  table.  It  also  shows 
how  much  they  had  increased  their  net  operating  income, 
with  the  resulting  percentage. 

In  the  same  way  the  table  shows  the  increase  in  net 
corporate  income  in  1913  over  each  one  of  the  preced- 
ing years,  and  the  increase  in  capital  stock  in  1913  over 
each  of  the  preceding  years,  with  its  corresponding  rate 
of  return. 

REDUCTIONS  AND  ADVANCES. 

It  was  sought  by  the  carriers  to  give  the  impression  that 
many  reductions  have  been  effected  by  state  commissions 
on  Western  railroads.  This  was  undertaken  by  numerous 
sweeping  generalizations  made  on  the  stand,  typical  of 
what  has  been  constantly  stated  and  reiterated  in  the 
public  press  for  a  number  of  years.  Upon  the  other  hand, 
rarely  does  any  person  see  anything  about  the  advances 
that  have  been  permitted  in  this  same  territory.  Mr. 
Felton  overstrained  this  point  when  he  stated  on  the 
stand  that  only  seven  advances  were  put  into  effect  in  this 
territory  last  year.    His  exact  language  was  as  follows : 

"Mr.  Felton:  Mr.  Thorne,  let  me  answer  you  a 
little  further,  because  I  think  I  can  make  this  clear  to 
you.  There  are  seven  advances  in  our  territory  in 
the  last  year  on  seven  articles  and  there  are  nine  re- 
ductions. 

"Mr.  Thorne:  Do  you  seriously  maintain  that 
there  have  only  been  seven  advances  in  the  past  year 
in  your  territory? 

"Mr.  Felton:  That  is  in  our  territory,  yes,  sir. 
That  statement  I  had  prepared  yesterday  and  it 
shows  nine  reductions  on  certain  commodities.  The 
traffic  officials  will  bring  all  that  out."    (tr.  271-272.) 

To  test  the  accuracy  of  Mr.  Felton 's  statement,  a  com- 
petent rate  man  was  asked  to  make  a  check  of  the  ad- 


THE  EVIDENCE  83 

vances  that  have  been  permitted  by  the  Commission  to 
become  effective  during  the  last  year,  that  were  proposed 
by  the  railroads  respondent  in  this  case.  Mr.  Kirkland 
was  employed  for  this  task.  He  was  formerly  in  the 
General  Freight  Department  of  the  Illinois  Central  Rail- 
road, and  has  had  25  years  of  experience  in  this  kind  of 
work. 

Mr.  Kirkland  found  advances  had  been  made  since 
January  1,  1914,  on  147  articles;  that  these  advances  ag- 
gregated in  number  6,735,  instead  of  7,  as  Mr.  Felton 
stated.  These  six  thousand  advances  are  in  addition  to 
large  and  substantial  changes  in  classification,  advances 
ranging  from  10  to  100%  in  amount,  on  over  200  different 
articles. 

In  making  the  foregoing  computation  Mr.  Kirkland 
would  find  advances  to  Chicago  and  points  taking  Chi- 
cago rates.  The  Western  Trunk  Line  tariffs  show  1,636 
points  taking  the  Chicago  rates  on  shipments  to  St.  Paul 
and  Minneapolis.  He  did  not  multiply  the  number  of  ad- 
vances to  St.  Paul  by  1,636.  Had  he  done  so,  instead  of 
being  six  or  seven  thousand  advances,  there  would  be 
several  million  advances.  In  the  same  way,  there  are  over 
1,700  stations  taking  Kansas  City  rates;  all  of  which  are 
affected  by  advances  to  and  from  Kansas  City.  There 
are  likewise  a  large  number  of  stations  taking  the  same 
rate  as  St.  Louis,  Chillicothe,  Omaha,  Peoria,  Galveston, 
Houston,  Winona,  Duluth,  etc.  In  the  same  way  he  only 
counted  these  advances  once.  The  details  from  which 
these  deductions  have  been  made  were  all  compiled  in  an 
exhibit  showing  the  articles  advanced,  the  amount,  the 
rate,  the  tariff,  etc.  Some,  of  course,  are  of  insignificant 
character.  Others  are  exceedingly  important.  The  gist 
of  this  evidence  is  simply  to  show  that  there  have  been 
large  numbers  of  advances  already  permitted  in  Western 
Trunk  Line,  Trans-Missouri,  and  Southwestern  Terri- 
tories   during    the    past    year.      You    have    already 


84  THE  EVIDENCE 

made  this  Western  Territory  share  a  large  burden  of  the 
increased  tax  forced  upon  it  by  the  carriers.  In  addition 
to  this,  you  have  made  these  Western  states  bear  a  large 
portion  of  the  advances  granted  to  eastern  railroads, 
since  the  bulk  of  our  class  traffic  goes  to  and  from  eastern 
points,  and  is  affected  by  the  advances  that  have  already 
been  granted. 

In  the  Eastern  Advance  Eate  Case,  Mr.  Morris  offered 
in  evidence  an  elaborate  compilation  of  concrete  rates, 
attempting  to  prove  that  the  general  level  of  freight  rates 
in  Central  Freight  Association  Territory  was  lower  than 
in  other  portions  of  the  country.  The  exhibit  had  the  de- 
sired effect  upon  the  minds  of  the  Commission.  The  ex- 
hibit which  he  offered  was  simply  a  comparison  of  tariff 
rates  without  any  handling  of  tonnage  affected,  and  with- 
out any  attempt  to  be  exhaustive,  or  to  summarize  the 
situation  as  a  whole ;  simply  a  series  of  rate  comparisons, 
chiefly  class  rates,  which  are  said  to  move  less  than  10% 
of  the  freight. 

We  have  pursued  the  same  policy  as  Mr.  Morris,  with 
the  exception  that  our  analysis  is  far  more  extensive  and 
exhaustive  in  character.  We  have,  in  the  Western  case, 
selected  15  commodities  on  each  of  which  there  is  ordi- 
narily a  large  tonnage;  also,  on  less  than  carload  rates, 
we  have  selected  a  few  representative  articles.  A  com- 
parison of  class  rates  east  and  west  would  be  meaning- 
less because  the  articles  are  classified  differently  in  the 
different  classifications,  and  because  there  is  a  larger 
number  of  classes  in  the  west  than  in  the  east. 

Mr.  Kirkland  stated  that  while  on  many  of  the  issues 
there  are  more  points  shown  in  the  west  than  in  the 
east;  yet  it  should  be  noted  that  in  all  parts  of  the  east, 
or  in  what  is  known  as  Central  Freight  Association  Trunk 
Line,  and  New  England  Territories,  the  scale  is  very 
much  the  same.  In  the  west  it  is  very  different,  and  an 
effort  has  here  been  made  to  show  the  rates  in  the  various 


THE  EVIDENCE  85 

sections  of  the  west,  or  those  portions  of  the  west,  known 
as  Western  Trunk  Line,  Trans-Missouri  and  Southwest- 
ern Territories.  This  exhibit  shows  in  a  remarkable 
manner  how  greatly  the  western  rates  already  exceed  the 
rates  in  effect  in  the  Eastern  Territory  after  the  advances* 
which  you  have  permitted  in  that  section,  had  gone  into 
effect. 


ANALYSIS  OF  REPRESENTATIVE  RAILROADS  INCLUDED  IN 
WETTLING'S  LIST  AFTER  PLACING  PERIODS  ON  SUBSTAN- 
TIALLY SAME  BASIS. 

Mr.  U.  G.  Powell,  chief  statistician  to  the  Nebraska 
State  Railway  Commission,  made  an  exhaustive  analy- 
sis of  representative  railroads  included  in  Mr.  Wettling 's 
list  of  forty-one  companies.  The  details  of  the  work  are 
set  out  in  the  exhibit  and  in  the  record. 

Mr.  Powell  ascertained  from  Mr.  Wettling,  as  soon  as 
he  could,  the  railroads  that  Wettling  was  going  to  cover 
in  his  exhibits.  From  this,  Mr.  Powell  made  a  selection 
of  six  that  he  thought  were  representative  of  Mr.  Wet- 
tling's list.  He  early  reached  the  conclusion  that  it  would 
be  impossible  to  cover  all  the  railroads  in  the  territory, 
and  he  desired  to  make  a  test  of  the  conclusions  arrived 
at  by  Mr.  Wettling. 

In  the  case  of  the  Santa  Fe  he  deducted  an  excess  book 
value  of  $102,000,000,  as  described  by  him  on  the  stand. 
This  was  added  to  the  property  account  without  anything 
whatever  being  added  to  the  property.  This  statement 
was  unchallenged  by  parties  to  the  case,  and  is  presump- 
tively correct.    It  was  also  testified  to  by  Mr.  Lauck. 

Mr.  Powell  made  one  other  change  in  the  property  ac- 
counts of  the  carriers  that  is  of  substantial  importance. 
He  found  the  Missouri,  Kansas  &  Texas  property  account 
excessive,  and  placed  it  on  substantially  the  average 


86 


THE  EVIDENCE 


value  per  mile  of  the  Chicago,  Burlington  &  Quincy,  the 
Chicago,  Milwaukee  &  St.  Paul,  the  Chicago  &  North 
Western  and  the  Rock  Island  railroads,  at  the  beginning 
of  the  period,  adding  betterments  and  improvements 
which  have  been  acquired  by  the  company  since  that  date. 
He  arrived  at  a  value  of  $35,000  per  mile,  which  corre- 
sponds quite  closely  to  the  figure  arrived  at  by  Mr.  Com- 
missioner Harlan  in  Texas  R.  R.  Co.  v.  A.,  T.  &  S.  F., 
reported  in  20  I.  C.  C.  at  page  463. 

By  placing  the  depreciation  accounts  upon  the  same 
basis  before,  and  after,  the  change  of  rules  which  oc- 
curred June  30,  1907,  and  by  deducting  from  property 
such  additions  and  betterments  as  have  been  built  out  of 
surplus,  Mr.  Powell  arrives  at  the  following  average 
rate  of  return  upon  property  investment  of  his  six  roads, 
from  the  year  1899  to  1914  inclusive : 


Excluding 

additions  and 

betterments 

Including 

additions  and 

betterments 

1899    

6.31 
6.91 

7.20 
7.93 
8.13 
7.45 
7.42 
8.50 

7.51 

8.88 
7.79 
8.91 
8.27 
8.35 
7.41 
7.93 
7.02 

8.02 
7.79 

5.37 

1900   

6.03 

1901   

5.98 

1902    

6.53 

1903    

6.68 

1904 

5.98 

1905    

5.90 

1906 

6.73 

Avg. 

8  years 

6.13 

1907   .. 

6.84 

1908   

5.97 

1909   

6.67 

1910   

6.21 

1911    

6.34 

1912   

5.54 

1913   

6.06 

1914   

5.38 

Avg. 

8  years 

6.06 

Avg. 

16  years 

6.11 

It  will  be  noted  that  Mr.  Wettling  's  division  of  the  pe- 
riods serve  several  purposes.    In  the  first  place,  it  threw 


THE  EVIDENCE  87 

the  panic  year,  1908,  into  the  latter  period,  and  the  ex- 
tremely prosperous  year,*  1907,  into  the  average  of  the 
first  period.  This  division  also  threw  the  burden  of  the 
change  of  accounts,  which  added  depreciation  accounts  to 
expenses  into  the  second  period,  and  also  the  additions  and 
betterments  out  of  surplus  to  property,  into  the  second 
period.  Mr.  Powell  has  carried  the  division  back  one 
year,  making  the  groups  cover  1899  to  1906  inclusive,  and 
1907  to  1914  inclusive.  This  shows,  on  the  basis  we  have 
described,  that  the  average  rate  of  return  on  property 
during  the  second  period  is  greater  than  during  the  first 
period. 

The  foregoing  table  covers  the  following  railroads ; 

ROADS 

A.,  T.  &  S.  F.  Ry.  Co 11,304.21  miles  owned  1914 

C,  B.  &  Q.  R.  R.  Co 8,942.46 

C,  M.  &  St.  P.  Ry.  Co 9,578.48 

C.  &  N.  W.  Ry.  Co 7,945.50 

C,  R.  I.  &  P.  Ry.  Co 7,631.87 

M.,  K.  &  T.  Ry.  Co 3,604.47 


Total  49,006.99 

While  the  railroads  selected  by  Mr.  Powell  are  not 
representative  of  the  Northwestern  group,  they  do  repre- 
sent the  list  of  railroads  Mr.  Wettling  selected. 

The  substance  of  this  presentation  is  to  the  effect  that 
the  exhibits  introduced  by  the  carriers'  experts  do  not 
correctly  show  the  true  comparisons  between  the  period 
since  1907  when  the  present  accounting  rule  of  the  Inter- 
state Commerce  Commission  became  effective,  and  the 
eight-year  period  prior  thereto;  because  in  the  prior 
period  a  very  large  amount  of  additions  and  betterments 
were  paid  out  of  surplus  and  charged  to  profit  and  loss, 
and  in  the  latter  period  were  charged  to  property  invest- 
ment. 

The  methods  used  by  the  carriers  in  the  prior  period 
had  the  effect  of  holding  down  or  shrinking  the  property 


88  THE  EVIDENCE 

investment  account  and  consequently  showing  a  greater 
net  operating  income  in  terms  of  percentage.  Under  the 
Interstate  Commerce  Commission's  accounting  system 
obtaining  in  the  latter  period,  this  situation  or  method  is 
completely  reversed. 

The  railroad  experts  made  no  attempt  to  harmonize 
or  recast  their  figures  as  between  the  two  periods  set  up 
by  them  in  their  exhibits,  and  as  a  consequence,  or  result 
of  the  different  accounting  methods  used  in  the  two  pe- 
riods (4835),  the  figures  and  exhibits  so  presented  by 
them  failed  to  disclose  accurately  and  correctly  the  true 
condition  as  between  the  said  periods. 

The  special  study  made  of  six  roads,  to-wit:  Santa 
Fe,  Burlington,  Milwaukee,  North  Western,  Rock  Island, 
and  the  Katy,  which  own  49,006  miles  of  road,  or  over 
50  per  cent  of  the  mileage  of  the  roads  involved  in  this 
controversy,  shows,  that,  in  the  period  1898  to  1906, 
$86,220,421.82  was  the  combined  surplus  earnings  of  said 
roads  used  in  additions  and  betterments  not  shown  in 
the  property  investment  account;  and  that,  in  the  period 
1907  to  1914,  not  only  was  surplus  so  applied,  charged 
to  property  investment  account,  but  that  the  carriers  in 
addition  charged  off  as  a  part  of  operating  expense  an 
arbitrary  depreciation  charge  of  $67,098,737.00. 

While  this  amount  is  deducted  arbitrarily  by  the  car- 
riers from  their  income  it  is  not  carried  on  their  books  as 
an  actual  liability  against  the  assets  of  the  companies. 
This  is  speaking  as  to  these  six  railroads. 

In  substance  the  study  shows  that  the  six  roads  in 
question  had  a  net  income  over  and  above  all  expenses 
sufficient  to  pay  an  average  return  of  7.51  per  cent  in  the 
first  eight-year  period,  and  8.02  per  cent  in  the  last  eight- 
year  period  on  all  property  investment  excluding  so  much 
thereof  as  was  paid  for  out  of  surplus  earnings ;  and  an 
average  return  of  6.13  per  cent  for  the  first  eight-year 


THE  EVIDENCE  89 

period  and  6.06  per  cent  for  the  last  eight-year  period 
shown  by  the  carriers '  own  balance  sheet. 

The  net  surplus  of  the  six  roads  in  question  after  pay- 
ing all  operating  expenses,  taxes,  interest  and  dividends, 
in  the  first  eight-year  period  was  $190,681,161.60,  and  in 
the  second  period  $228,412,885.69,  or  a  total  for  the  en- 
tire period  of  $419,094,047.29.    (tr.  4837.) 

1914,  A  YEAR  OF  DEPRESSION. 

The  world-wide  financial  stringency  in  1913,  which  was 
followed  by  a  general  depression  in  business  throughout 
the  United  States  in  the  fiscal  year  1914,  is  common  knowl- 
edge. This  was  specifically  referred  to  by  the  Commission 
in  its  decision  in  the  Five  Per  Cent  Case,  31 1.  C.  C,  419 ; 
also  on  page  424  in  the  same  decision.  The  carriers  frank- 
ly conceded  the  same  situation  in  their  testimony  in  this 
proceeding.  The  year  1912  was  a  year  of  expansion  in 
general  business,  upon  a  pronounced  scale  along  many 
lines.  The  year  1913  was  a  striking  contrast  with  1912. 
The  situation  was  acute  in  Europe.  Large  industrials, 
like  the  General  Electric,  were  obliged  to  pay  exceedingly 
high  rates — as  much  as  614%  for  $8,000,000  upon  a  nine 
months'  maturity.  By  April  29th  the  municipal  bond 
market  gave  evidence  of  rapidly  increasing  stringency. 
New  York  City  was  obliged  to  pay  4y2%  for  $45,000,000 
long  term  bonds,  against  previous  issues  of  4%  and  4*4% 
in  preceding  years.  Over  fifteen  and  one-half  million  of 
municipal  bond  offerings  proved  unsuccessful  in  April, 
nineteen  millions  in  May,  twenty-five  and  one-half  mil- 
lions in  June,  and  fifteen  millions  in  July.  In  June  Ten- 
nessee failed  to  place  4%  forty  year  refunding  bonds ;  and 
in  order  to  provide  for  maturing  3's,  was  obliged  to  is- 
sue $9,401,000  5%  notes,  which  were  sold  on  a  7%  basis. 

Internationally,  disturbances  commenced  to  assume 
serious  proportions.  The  Mexican  situation  became  cha- 
otic with  the  overthrow  of  the  Madero  government.    In 


90  THE  EVIDENCE 

Europe,  the  Balkan  disturbances  commenced,  and  the 
period  of  conflict  occupied  the  first  nine  months  of  the 
year,  upsetting  the  international  money  markets.  The 
enormous  increase  in  the  armaments  of  France  and  Ger- 
many produced  distrust  which  was  disconcerting,  and 
which  helped  to  produce  a  world  period  of  depression  and 
crisis. 

The  heavy  governmental  borrowings  forced  such  a 
stringency  in  loanable  funds  that  London  bankers  agreed 
to  hold  up  all  corporate  financing. 

The  market  prices  of  Mexican  investments  suffered 
severe  losses. 

The  crops  of  a  few  staples  during  the  summer  of  1913 
suffered  severely  by  widespread  drought.  The  situation 
is  briefly  summarized  in  the  following  table : 

Shortage 
compared  with  1912 

Corn 677,758,000  bushels 

Oats 296,569,000  bushels 

Potatoes 89,122,000  bushels 

A  general  liquidation  in  the  stock  markets  continued 
pretty  much  throughout  the  year.  Industrial  stocks  and 
railway  stocks  were  both  similarly  affected. 

The  first  half  of  1914  was  a  dismal  year  for  general 
business.  War  in  Eastern  Europe  did  not  break  out 
until  August;  but,  preceding  this  cataclysm,  the  indus- 
trial situation  kept  continually  growing  worse.  The 
Mexican  situation,  upon  several  occasions,  threatened 
complications  of  a  most  disastrous  nature. 

From  the  high  points  in  1912,  up  to  the  closing  of  the 
New  York  Stock  Exchange,  the  two  averages  of  railway 
and  industrial  stocks,  kept  daily  by  the  Wall  Street  Jour- 
nal, registered  a  decline  of  nearly  thirty  per  cent  each, 
conclusively  proving  that  all  business  has  been  going 
through  one  of  those  depressions  which  have  occurred,  at 


THE  EVIDENCE  91 

intervals  of  ten  or  twenty  years,  during  the  past  one 
hundred  years. 

These  facts  which  we  have  recited,  are  not  related,  with 
particular  materiality,  to  the  present  case,  except  as  they 
are  matters  of  common  knowledge,  with  which  all  are 
generally  acquainted.  In  our  discussion  of  the  issues  in 
this  case,  the  fact  that  the  year  1914  was  a  year  of 
general  depression  throughout  the  world  must  be  kept 
in  mind.  It  was  testified  to  by  Mr.  Norton,  who  detailed 
the  financial  stringency.  Mr.  Chambers  mentioned  it  (tr. 
13662) ;  also  Mr.  Wallace  (tr.  4368). 

During  the  cross-examination  of  Mr.  Wade,  he  said: 

1 '  If  you  take  the  year  1914,  you  are  not  fair  in  mak- 
ing the  comparison,  because  in  the  first  place,  four 
months  of  that  year  you  were  in  the  midst  of  a  panic 
and  the  other  eight  you  were  in  a  depression"  (tr. 
399). 

Mr.  Bush,  president  of  the  Missouri  Pacific,  referred 
to  the  same  fact: 

1  ■  Mr.  Barrow :  To  what  condition  do  you  attribute 
the  falling  off  in  your  revenues,  Mr.  Bush,  freight 
rates  or  depression? 

1 *  Mr.  Bush :  I  attribute  the  falling  off  in  our  gross 
revenue,  of  course,  to  the  general  depression  which 
has  prevailed  throughout  that  section,  which  has 
affected  not  only  our  road,  but  all  of  those  roads" 
(tr.  524). 

It  was  so  stated  by  the  Commission,  in  its  decision, 
as  referred  to  above.  It  was  also  admitted  by  carriers 
in  this  proceeding.  The  general  depression  in  all  industry 
was  evidenced  by  witnesses  engaged  in  all  lines  of  busi- 
ness, who  offered  evidence  in  the  case. 

It  is  unfair  to  accept  that  year  as  representative.  For 
these  reasons,  we  will  have  occasion  to  refer  more  fre- 
quently to  the  year  1913. 


92 


THE  EVIDENCE 


« 

m 

gp 
£P 

M 

od 
oa 
«M 

oo 

MM 

oo 


03      C»S 


MfcPg 

O    HH 

— — 

O    pW 

P 
H 


&2 

HO 

M 
M^ 

03  P 

Oh 
EhK 


^ob  oo  oo  t^  ws 
^^»o  *©  to  »©  to 


OL1CDMO        CO  CC  00  "«*  «*< 


2§§§g    ?SKS§ 


.^"C^OM        NNOOS 


COU510  0N 

oioqoqr-;^ 


M^fflOCO    f  IONNHO 
rH^HO^Ht^  I   OSMacO-^CO 

id  io  10  "O  ■*  ;  i-  ■*  ■*  ■*  ■» 


_OCOlOrtlO 

■*^«5  iou3ioid 


t^ONCOO 


scor-co      ««»( 


<N>oc»cooo  i 
nOMWH , 


>  lO    Ift  OS 

)oo   osos 


■^"oooo   •»)<  o»  N  eo  ■"!<   ■*""»•  t— *f<  co 


n^CO  CO  CO  CO  CO 


^oiflwiooi      02i--m<os<m      ooocooi— 


•^cooosoo      ooooooq 

^  ^  ^*  CO  CO        CO  CO  CO  CO 


■»f  ■>»<  o  en  cm      onomio 


Oit>-OCO»C        00<OOS»-<CO        XIOU5HO       t>-c 


■**  co —<  e»  e»      oot»eo.-iN 


CO  ■"*"*<  00  00        (OiOH^OO 
COCOCOIM-H        HO««0 


©rtOICO**        WOM10O 
ooocooooco       00Q0OO0O0O 


O  —  <MCOt)I 


m  a    .       1.  -  31?!  a 


lis  rfiSj 

OS'S    f'l|JfS 


as  oto „« 

<a-Ea     ^32  BS  s-g 

1*11 I? 

aS-S|2^ 

8  1  =5  B       '2 

!  Willi 

1  fillll 

■^■i^s  I*] 

mQ.Ss| 

."8  "8  Si"* 

BlfiSl 


3§m 

S     «2 
.9-c3  b 


o.a.9 


111        6 


THE  EVIDENCE  93 


EXCESSIVE  DEPRECIATION  CHARGES. 

Depreciation  charges  have  been  excessive  on  some  rail- 
roads, and  deficient  on  others.  However  inadequate  de- 
preciation charges  may  be,  yet  they  can  be  a  complete 
duplication  of  other  charges ;  in  which  case  the  deprecia- 
tion is  fully  cared  for  elsewhere  in  the  expense  account. 
Can  one  be  justified  in  finding  that  depreciation  charges, 
as  a  whole  in  this  territory,  have  been  too  low  up  to  recent 
years?  If  it  were  true  that  the  carriers  were  unable  to 
take  care  of  this  phase  of  their  accounting  out  of  any 
other  item  in  their  accounts  than  under  depreciation,  then 
it  would  be  completely  established  by  the  record  in  this 
case  that  the  depreciation  charges,  prior  to  1908,  were  in- 
adequate; and  it  would  also  be  true  that  they  are  inade- 
quate as  to  some  carriers  today,  and  more  than  adequate 
as  to  others.  As  to  the  net  result,  a  compilation,  or  re- 
view, of  each  important  railroad  would  have  to  be  made. 

But  we  find  absolutely  the  opposite  to  be  true ;  for  de- 
preciation charges  can  be  an  entire  duplication  of  other 
items  in  the  account,  and  can  be,  and  have  been,  taken 
care  of  under  other  headings  in  the  expense  accounts. 
Charges  to  depreciation  of  one-half  of  one  per  cent  can  be 
complete  duplication  of  other  portions  of  expense  accounts. 
This  was  frankly  conceded  by  Mr.  Wettling,  a  witness  of- 
fered on  behalf  of  all  of  the  defendant  carriers.  This  con- 
cession made  by  Mr.  Wettling  is  true  and  correct.  The 
admission  made  by  Mr.  Wettling  was  further  confirmed 
by  such  officials  as  Mr.  Bush  of  the  Missouri  Pacific,  and 
others. 

The  manner  in  which  this  has  been  made  possible  in  the 
past,  we  will  attempt  to  describe  briefly,  using  the  lan- 
guage of  the  witness  from  time  to  time. 

A  carrier  owning  a  large  number  of  wooden  cars  as 
they  grow  old,  can  practically  dismantle  them,  rebuilding 


94  THE  EVIDENCE 

them  with  steel  under  frames,  providing  the  company 
with  a  new  equipment  almost  in  its  entirety,  and  charg- 
ing practically  all  of  the  cost  except  the  underframe  to 
operating  expenses  under  repairs.  Mr.  Bush  testified 
that  if  a  company  rebuilds  a  large  number  of  cars  during 
a  given  year,  it  can  more  than  take  care  of  the  deprecia- 
tion on  its  equipment  for  that  particular  year.  Assum- 
ing the  life  of  a  thousand  cars  to  be  20  years  without 
much  repairing,  they  can  be  repaired  and  rebuilt  over  and 
over  in  the  shops  of  the  company  and  last  for  several  gen- 
erations.    This  is  a  constant  practice  of  the  companies. 

Assuming  that  the  depreciation  on  a  certain  number  of 
cars  would  ordinarily  amount  to  $50,000;  if  a  company,  in 
fact,  spent  more  than  $50,000  out  of  repairs  in  rebuilding 
its  cars  in  any  given  year,  it  has  more  than  taken  care  of 
the  so-called  depreciation.  Now  if  that  company,  in  addi- 
tion to  these  repairs  and  rebuilding,  adds  an  account 
known  as  Depreciation  Charge  then  it  simply  doubles  up 
operating  expenses  as  a  bookkeeping  proposition.  What 
we  have  said  as  to  freight  cars  applies  also  to  passenger 
cars  and  locomotives. 

These  facts  constitute  the  chief  reason  why  some  of 
the  carriers  have  protested  so  bitterly  in  the  past,  and  so 
constantly,  against  the  addition  of  the  depreciation 
charge  in  the  accounts,  because  that  factor  is  already 
taken  care  of  elsewhere  in  their  accounts.  Different  com- 
panies handle  their  accounts  according  to  different  meth- 
ods. In  some  instances,  a  charge  of  one-half  of  one  per 
cent  to  depreciation,  as  Mr.  Wettling  says,  might  con- 
stitute an  entire  duplication.  It  is  very  evident  from  the 
records  of  the  carriers  that  this  has  occurred,  in  the  case 
of  several  railroad  companies. 

BURLINGTON  RAILROAD. 

The  following  extract  from  the  testimony  of  Mr.  Stur- 
gis  in  the  1910  case  was  offered  in  the  present  proceeding: 


THE  EVIDENCE  95 

"Mr.  Dawes:  Now,  Mr.  Sturgis,  table  Exhibit  No. 
4  purports  to  be  operating  revenue  and  expenses  re- 
classified to  show  divisions  as  now  provided  in  the 
present  Interstate  Commerce  Commission's  classi- 
fication and  excluding  amounts  expended  for  better- 
ments and  amounts  carried  to  depreciation  and  other 
funds.  That  table  is  to  be  read  in  connection  with 
4- A  and  4-B  following  is  it  not? 

"Mr.  Sturgis:    Yes. 

"Mr.  Dawes:  4- A,  as  I  understand  it,  will  show 
the  amounts  which  were  deducted  from  the  amounts 
stated  in  Exhibit  No.  4  in  order  to  conform  with  the 
reclassification  method  adopted  by  the  Interstate 
Commerce  Commission ! 

"Mr.  Sturgis:  No;  that  is  not  quite  right.  They 
are  not  deducted  from  the  figures  shown  in  Exhibit 
No.  4,  but  from  the  figures  returned  to  the  Interstate 
Commerce  Commission  in  the  annual  reports,  and  if 
I  may  state  the  object  of  that  modification,  it  is  this : 
The  classification  of  operating  expenses  has  changed 
during  the  ten  years  covered  by  this  statement.  We 
had  our  own  classification  at  one  time,  and  we  had 
the  interstate  at  another  time,  and  effective  July  1, 
1907,  the  Interstate  Commerce  Commission  changed 
its  classification,  the  effect  of  which  was  to  take  out 
of  operating  expenses  a  considerable  number  of  items 
and  some  considerable  amounts  previously  included 
in  operating  expenses.  It  also  to  some  extent  affected 
the  earnings.  The  classification  also  affected  earnings 
to  some  extent.  That  was  almost  entirely  brought 
about  by  the  classification  that  went  into  effect  July 
1, 1907,  but  there  was  some  slight  effect  still  felt  dur- 
ing the  following  year,  because  there  was  another 
change,  a  small  one  or  minor  one,  in  the  classification 
taking  effect  July  1,  1908.  The  object  was  to  elimi- 
nate from  this  statement  everything  that  prevented 
a  fair  and  clear  comparison  of  the  operating  figures 
for  those  10  years,  and  Exhibit  4-A  shows  what  was 
deducted  on  account  of  the  changes  in  classification. 

"Mr.  Dawes:  It  shows  the  amount  deducted  each 
year? 

"Mr.  Sturgis:     Each    year    under   the    different 


THE  EVIDENCE 

items.  Exhibit  4-B  takes  out  of  the  operating  classi- 
fication everything  that  was  added  there  that  was 
not  a  recognized  operating  expense  at  the  beginning 
of  the  period — 

"Mr.  Atwood:  Just  to  follow  you  there,  Exhibit 
No.  4  is  gotten  up  in  just  the  way  you  always  did  keep 
the  accounts? 

"Mr.  Sturgis:    No. 

"Mr.  Atwood:    That  is  corrected,  is  it? 

"Mr.  Sturgis:  That  is  corrected  so  that  every  fig- 
ure on  that  page  is  on  a  uniform  basis. 

"Mr.  Atwood:    Under  the  new  rules? 

1 '  Mr.  Sturgis :    Under  the  new  rules. 

"Mr.  Dawes:  And  A  and  B  show  in  detail  the 
changes  and  corrections  made  to  produce  that  uni- 
form basis  which  enables  you  gentlemen  to  look  at 
these  exhibits  and  state  just  what  is  taken  out  of 
them  and  whether  you  think  they  are  rightly  or 
wrongly  taken  out. 

"Mr.  Sturgis:  Now  Exhibit  4-B  shows  what  was 
taken  out  that  did  not  strictly  belong  to  operating 
expenses,  according  to  the  understanding  of  operat- 
ing expenses  at  the  beginning  of  the  period.  For  in- 
stance, you  will  see  by  reference  to  column  3  that 
depreciation  on  equipment  began  with  us  in  1905. 
That  has  all  been  eliminated  from  the  figures  before 
showing  them  on  Exhibit  No.  4,  as  otherwise  the  oper- 
ating expenses  would  show  an  improper  per  cent  of 
increase. 

' '  Mr.  Thorne :  Do  you  understand  the  depreciation 
charges  are  not  or  are  included  on  Table  No.  4? 

"Mr.  Sturgis:    They  are  not. 

"Mr.  Atwood:  Otherwise  those  years  after  1905 
would  be  out  of  line  with  what  went  before. 

1  i  Mr.  Sturgis :  That  is  a  correct  understanding  on 
your  part. 

"Mr.  Dawes:  The  effect  of  making  these  deduc- 
tions, as  I  understand  it,  is  rather  against  the  rail- 
road, because  the  operating  ratio  would  be  somewhat 
lower  if  these  things  had  been  left  in. 

"Mr.  Sturgis:     It  works  both  ways.     The  items 


THE  EVIDENCE  97 

deducted  on  4-A  are  items  that  the  Interstate  Com- 
merce Commission,  under  its  new  classification,  left 
out  of  operating  expenses,  and  therefore  if  they  had 
been  left  in  the  increase  from  1901  to  1910  would  not 
have  been  shown  correctly  large;  in  other  words,  the 
tendency  of  the  change  by  the  Interstate  Commerce 
Commission  is  to  destroy  the  value  of  their  figures  in 
comparisons  of  this  kind.  Now,  this  is  no  criticism 
on  my  part,  the  leaving  out  of  these  items;  I  had  a 
good  deal  to  do  with  leaving  out  a  good  many  of  them, 
and  believe  they  should  be  left  out;  but  I  want  to 
point  out  that  they  reduced  the  operating  ratio  im- 
properly as  compared  with  what  it  was  in  1901.  But 
from  1907  it  is  all  right.  Now,  the  other  exhibit  4-B 
shows  items  that  worked  the  other  way.  If  they  had 
been  left  in,  then  our  figures  would  have  shown  an 
abnormal  increase. 

"Mr.  Dawes:  But  as  the  result  of  both  deductions 
the  figures  are  shown  on  the  same  basis  for  the  period 
which  they  cover. 

"Mr.  Sturgis:    Yes. 

1 '  Mr.  Dawes :  And  all  this  deduction  is  made  nec- 
essary by  the  new  methods  of  accounting  established 
by  the  Commission,  which  was  different  than  as  prac- 
ticed by  our  railroad  up  to  that  time. 

"Mr.  Sturgis:    Yes. 

"Mr.  Lyon:  Do  I  understand  you  to  say  that  ow- 
ing to  this  change  in  the  method  of  keeping  these  ac- 
counts that  a  comparison  of  the  operating  ratio  of 
1910  with  1901,  for  instance,  is  not  fair  and  does 
not  represent  the  true  status  f 

"Mr.  Sturgis:  It  is  not  a  question  of  veracity 
at  all. 

"Mr.  Lyon:    I  understand;  I  just  want  to  know — 

"Mr.  Sturgis:  If  the  operating  ratio  of  the  Chi- 
cago, Burlington  &  Quincy  Railroad  is  taken  from 
the  published  reports  of  the  Interstate  Commerce 
Commission  for  the  years  1910  and  1901,  the  percent- 
age of  increase  will  not  be  correct,  and  that  is  brought 
about  by  the  change  in  the  classification  of  operating 
expenses. 

"Mr.  Lyon:    The  question  I  wanted  to  put  to  you 


THE  EVIDENGE 

was,  Will  the  operating  ratio  in  1910  appear  rela- 
tively too  great  or  relatively  too  small? 

"Mr.  Sturgis:  It  will  appear  relatively  too  small 
by  between  2  and  3%. 

"Mr.  Lyon:  I  have  been  informed  directly  to  the 
contrary,  and  I  wanted  to  know. 

"Mr.  Atwood:  In  1901  he  said  it  would  be  smaller 
by  2  or  3%  than  it  should  be. 

"Mr.  Lyon:    Would  it  be  smaller  in  1901! 

"Mr.  Sturgis:    The  comparison  of  1910 — 

"Mr.  Dawes:  What  would  the  operating  ratio  in 
1901  be,  adopting  the  accounting  methods  now  in 
vogue  f  Would  it  be  greater  than  has  been  shown,  or 
less? 

"Mr.  Sturgis:    Smaller. 

' '  Commissioner  Clark :  It  is  stated  on  this  exhibit 
in  plain  English  that  it  makes  the  operating  ratio  in 
the  years  subsequent  to  1907  less  than  if  the  old 
classification  had  been  in  effect. 

"Mr.  Lyon:  That  is  the  reason  I  asked  the  ques- 
tion, because  I  am  informed  directly  to  the  contrary. 

"Mr.  Sturgis:  I  think  that  is  easily  explained. 
The  items  taken  out  owing  to  the  change  in  the  classi- 
fication, the  putting  of  certain  items  out  of  operating 
expenses  into  other  income  and  so  forth,  from  out- 
side operations — the  statisticians  will  understand  my 
language — makes  the  operating  expense  ratio  too  low 
in  1910,  lower  than  it  would  have  appeared  in  com- 
parison with  1901;  but  the  addition  of  depreciation, 
for  instance,  would  tend  to  increase  the  operating 
ratio.    That  is  taken  care  of  by  me  in  Exhibit  4-B. 

1 '  Mr.  Lyon :  Then  you  are  speaking  for  your  road 
alone  in  the  making  of  that  statement? 

"Mr.  Sturgis:  No;  I  believe  that  to  a  very  large 
extent  it  would  apply  to  all  the  roads. 

"Mr.  Lyon:  Our  statisticians  differ  directly  with 
that,  but  I  want  to  get  it  accurately. 

"Mr.  Sturgis:  I  do  not  think  with  that  latter 
statement  they  do  differ. 

"Mr.  Lyon:    They  say  with  some  roads,  and  pos- 


THE  EVIDENCE  99 

sibly  this  is  one  of  them,  that  is  strictly  true.  But 
with  the  country  at  large  that  is  a  fact. 

'  'Mr.  Dawes :  As  to  our  road,  of  course.  The  other 
conditions  you  do  not  undertake  to  testify  with  refer- 
ence to? 

"Mr.  Sturgis:  No. 

"Mr.  Dawes:  Your  answer,  then,  will  be  confined 
to  the  conditions  as  they  appear  from  our  own  books 
and  statistics,  Mr.  Sturgis ! 

"Mr.  Sturgis:  Yes."  Pages  937-938-939-940,  Evi- 
dence in  Matter  of  Proposed  Advances  in  Freight 
Bates,  61st  Congressional  Report,  1910-1911,  Senate 
Vol.  48. 

The  tables  to  which  reference  is  made  show  excessive 
depreciation  charges  (frankly  conceded  by  Mr.  Sturgis), 
amounting  to  several  millions ;  these  exhibits  are  given  in 
the  Abstract. 

ATCHISON,  TOPEKA  &  SANTA  FE. 

In  connection  with  the  preceding  testimony  of  Mr. 
Sturgis,  we  call  your  attention  to  the  Atchison,  Topeka 
&  Santa  Fe  Co.  operations  since  the  installation  of  the 
depreciation  charge.  Turn  to  Powell  Exhibit  No.  2.  It 
will  be  noted  that  the  repairs,  entirely  exclusive  of  re- 
newals and  depreciation,  have  averaged  since  1908  more 
than  repairs,  renewals  and  depreciation,  per  locomotive, 
amounted  to  altogether  for  any  preceding  year.  The  same 
is  true  of  repairs  to  passenger  cars.  The  same  thing  is 
true  of  repairs  to  freight  cars,  with  only  one  exception, 
1907.  The  depreciation  charge  of  the  Santa  Fe  is  evi- 
dently an  entire  duplication;  and  in  fact  their  repairs 
much  more  than  take  care  of  all  factors  involved.  The 
high  stage  of  efficiency  of  the  North  Western  is  well 
known  to  the  traveling  and  shipping  public. 

The  undisputed  evidence  in  the  case  is  that  this  com- 
pany not  only  maintains,  but  has  been  improving,  its 
property  out  of  operating  expenses  during  the  past  few 


100  THE  EVIDENCE 

years,  raising  the  property  to  a  higher  standard.  Mr. 
Chambers'  evidence  on  this  subject  was  not  denied  by 
rebuttal  testimony;  nor  was  it  even  seriously  questioned 
on  cross-examination.  We  have  used  the  North  Western 
as  a  standard  in  the  territory,  and  have  made  extended 
analyses  of  its  accounts,  which  are  somewhat  extensively 
described  in  the  record.  This  company  has  always  been 
noted  for  its  high  efficiency;  it  has  not  gone  to  the  extreme 
during  the  past  few  years  that  other  companies  have,  be- 
cause the  North  Western  property  was  already  in  splen- 
did condition. 

Last  year  the  repairs,  alone,  entirely  aside  from  its 
charges  to  depreciation  and  renewals,  on  the  Santa  Fe, 
averaged  $3,506.50  per  locomotive,  while  all  charges  to 
repairs,  renewals  and  depreciation  combined,  on  the 
North  Western,  averaged  only  $2,640.00,  and  the  previous 
year  it  was  $2,722,  these  two  years  being  the  highest  in 
the  entire  history  of  the  North  Western.  Clearly,  the 
Santa  Fe  has  been  duplicating  some  charges.  From  this 
it  is  evident  that  on  the  Santa  Fe,  its  repairs  alone  for 
locomotives,  amounting  to  $6,451,  976,  in  1914,  was  more 
than  enough  to  take  care  of  all  factors — repairs,  renewals, 
and  depreciation. 

On  passenger  cars  the  repairs,  alone,  on  the  Santa  Fe, 
amounted  to  more  than  six  million  dollars,  averaging 
$738  per  car.  On  the  North  Western  the  repairs,  renewals 
and  depreciation,  all  combined,  only  amounted  to  $565  per 
passenger  car.  The  Santa  Fe  total  passenger  receipts 
were  approximately  16%  greater  than  those  of  the  North 
Western;  while  its  repairs,  alone,  of  passenger  cars,  was 
31%  greater  than  repairs,  renewals  and  depreciation, 
combined,  on  the  North  Western. 

The  repairs  alone  per  freight  car  on  the  Santa  Fe,  aver- 
aged $72.85  per  car.  This  was  greater  than  the  average 
on  the  North  Western,  for  repairs,  renewals  and  depre- 
ciation combined,  for  any  year  prior  to  1913,  excepting 


THE  EVIDENCE  101 

only  1906,  and  1907.  During  those  two  years  on  the  North 
Western  the  average  reached  $83.65  and  $84.13,  being  a 
jump  of  over  43%  over  any  preceding  year.  That  re- 
markable situation  was  accounted  for  by  reason  of  the 
fact  that  the  North  Western  that  year  bought  $5,000,000 
worth  of  new  freight  cars,  and  this  increased  immensely 
the  replacement  and  renewal  account  of  those  two  years, 
making  them  abnormal,  as  described.  The  next  abnormal 
increase  on  the  North  Western  freight  car  maintenance 
occurred  in  1913  and  1914,  when  an  increase  of  30%  oc- 
curred in  repairs,  alone,  per  car,  in  a  single  year.  These 
conditions  were  extensively  discussed  in  Mr.  Chambers' 
testimony.  The  uncontradicted  evidence  is  that  the  North 
Western  has  not  only  been  maintaining,  but  it  has  been 
improving,  its  car  equipment  out  of  operating  expenses 
during  the  past  two  years ;  and  yet  the  Santa  Fe  mainte- 
nance was  20%  greater,  per  freight  car,  last  year  than  that 
of  the  North  Western. 

In  actual  practice,  and  in  the  face  of  theories,  we  find 
that  the  adequacy,  or  inadequacy,  of  the  depreciation 
charges  for  a  given  railroad  depend  upon  the  amounts 
charged  to  repairs. 

In  the  light  of  such  facts  as  those,  the  worthless  char- 
acter of  any  average  depreciation  as  being  adequate,  or 
inadequate,  for  a  given  group  of  railroads,  consolidated, 
is  certainly  apparent.  You  must  analyze  the  repair  ac- 
counts of  each  railroad  in  connection  with  its  depreciation 
and  renewal  charges. 


ARGUMENT. 


Railway  companies  that  are  honestly  and  intelligently 
constructed,  financed  and  managed,  are  entitled  to  a  rea- 
sonable return  on  their  property  over  and  above  all  legi- 
timate operating  expenses ;  and  their  securities  should  be 
attractive  investments.  Justice  entitles  them  to  this, 
and  the  interests  of  the  public  demand  it. 

Our  task  is  to  see  whether  the  Western  railroads  meet 
these  requirements. 

ELEMENTARY  PRINCIPLES. 

Before  entering  upon  an  analysis  of  these  railroads,  a 
few  elementary  rules  will  be  mentioned,  that  must  always 
be  considered,  when  analyzing  financial  statistics  of  rail- 
road companies. 

PERIODICAL  RISE  AND  FALL  IN  PROSPERITY  OF  ANY  BUSINESS. 

First :  There  is  always  a  wave,  an  ebb  and  flow,  in  the 
prosperity  of  all  industries,  entirely  aside  from  periods  of 
severe  financial  depression.  This  is  true  today,  always 
has  been  true,  and  always  will  be  true.  Proper  allowance 
must  be  made  for  abnormal  years,  whether  extremely 
prosperous  or  extremely  poor.  Any  review  covering  a 
few  months,  or  a  few  years,  is  entirely  inadequate,  and  is 
an  absurd  method.  A  broad  perspective  can  only  be  ob- 
tained by  an  extended  review. 

PANICS. 

Second:  Proper  allowance  must  be  made  for  panics, 
and  for  years  of  depression  prevailing  throughout  busi- 
ness generally. 


THE  ARGUMENT  103 

NEW  CONSTRUCTION. 

Third :  New  construction  rarely  earns,  during  the  first 
few  years  of  its  life,  the  same  amount  as  old,  well  sea- 
soned properties. 

Fourth :  New  construction  not  only  affects  a  decline  in 
the  average  rate  of  return,  because  of  its  light  earnings 
during  the  early  years  of  its  life ;  but  it  also  affects  a  large 
increase  in  actual  operating  expenses  for  materials  and 
supplies,  while  the  construction  is  in  progress,  by  reason 
of  the  accounting  rules  relative  to  renewals,  or  replace- 
ments, thereby  automatically  reducing  net  revenues,  or 
surplus  earnings,  while  the  construction  is  going  on  re- 
gardless of  the  prosperity  of  the  company. 

Fifth :  New  construction  affects  another  increase  in 
operating  expenses,  because  large  portions  of  the  labor 
costs  connected  with  additions  and  betterments,  can  be 
charged  to  operating  expenses.  In  the  case  of  ballast, 
rails,  ties,  roadway  and  track,  the  labor  charges  are  gen- 
erally greater  than  all  other  charges  put  together. 

CHANGES  IN  ACCOUNTING  RULES. 

Sixth:  A  comparison  of  the  resulting  net  revenues, 
when  there  is  a  substantial  change  in  the  accounting  rules 
as  to  basic  factors,  like  property  investment,  or  operating 
expenses,  is,  of  course,  an  absolutely  false  and  misleading 
representation  of  the  tendency  of  net  revenues. 

CHANGES  IN  MAINTENANCE  STANDARDS. 

Seventh :  A  comparison  of  the  resulting  net  revenues, 
when  there  is  a  substantial  change  in  the  maintenance 
standard  is  absolutely  fallacious,  as  any  indication  what- 
ever of  the  tendency  in  the  net  revenues.  (Whether  the 
resulting  net  revenues  are  adequate,  in  themselves,  pre- 
sents another  issue ;  and,  as  to  this  issue,  book  value,  or 


104  THE  ARGUMENT 

the  so-called  property  investment,  is  not  the  basis.)  No 
comparison  of  tendencies  is  justifiable  until  the  control- 
ling factors  are  placed  upon  substantially  the  same  basis. 

BOOK  VALUE. 

Eighth :  Care  must  be  taken  to  distinguish  between  an 
analysis  of  the  adequacy  of  a  net  return,  in  and  of  itself, 
and  the  tendency  in  net  returns  over  a  period  of  years. 
Different  principles  and  different  bases  are  used  in  the 
one  case  and  in  the  other. 

Return  on  book  value,  or  the  so-called  property  invest- 
ment, is  no  test  as  to  the  adequacy  of  the  return  itself,  as 
this  Commission  has  repeatedly  held  that  the  said  book 
cost  of  railroad  properties  is  no  indication  of  their  orig- 
inal cost  or  of  their  present  value. 

Book  value  can  be  fairly  used  for  general  comparative 
purposes  as  to  the  profits  of  a  company,  and  its  justifica- 
tion for  an  advance  in  freight  rates,  providing:  (a)  the 
important  factors  in  the  accounts  are  placed  upon  sub- 
stantially the  same  basis  during  the  years  compared;  and 
(b)  providing  you  do  not  include  in  the  said  book  value 
the  cost  of  items  upon  which  the  company  is  not  entitled 
to  rely  as  a  justification  for  an  advance  in  freight  rates. 

WEAK  PROPERTY  NOT  CORRECT  STANDARD. 

Ninth :  A  weak  property  cannot  be  accepted  as  a  stan- 
dard for  testing  the  adequacy  of  revenues  in  any  industry, 
unless  that  class  of  properties  handles  the  bulk  of  the 
business.  If  the  larger  portion  of  the  business  in  any 
given  territory  is  handled  by  successful  properties,  a  rep- 
resentative company  of  that  class  must  be  adopted  as  the 
standard,  if  progress  is  to  be  made;  otherwise  you  place 
a  premium  upon  inefficiency;  you  adopt  a  standard  that 
prevails  in  no  other  business  on  the  face  of  the  earth. 


THE  ARGUMENT  105 

SUBSIDIARY  LINES  NOT  STANDARD. 

Tenth :  Subsidiary  lines,  or  portions  of  systems,  should 
not  be  accepted  as  any  criteria  of  conditions.  The  parent 
company,  or  the  system,  must  be  the  one  considered. 

MISMANAGEMENT. 

Eleventh :  The  public  is  entitled  to  demand  of  our  rail- 
road companies  that  they  shall  meet  the  reasonable,  legiti- 
mate requirements  of  modern  finance,  and  operation;  and 
upon  their  failure  to  do  so,  they  are  not  entitled  to  the 
return  received  by  those  companies  which  do  meet  those 
requirements. 

A  company  is  not  entitled  to  recoup  itself  out  of  ad- 
vanced freight  rates,  for  losses  due  to  mismanagement  of 
the  property,  or  through  financial,  or  other  blunders,  on 
the  part  of  those  in  control  of  the  company. 

Any  general  averages  including  the  rate  of  earnings 
of  companies  guilty  of  mismanagement,  or  high  finance, 
cannot  be  accepted  as  a  basis  for  advancing  freight  rates. 

CAPITALIZING  PERMANENT  IMPROVEMENTS    BUILT    OUT    OP 
EARNINGS. 

Twelfth :  Improvements  built  out  of  current  earnings, 
charged  either  to  operating  expenses  or  surplus,  should 
not  be  capitalized;  but  this  Commission  has  no  power  to 
prevent  them  from  being  so  capitalized. 

Improvements  built  out  of  earnings  in  the  past,  and 
capitalized,  do  not  constitute  a  justification  for  an  ad- 
vance in  freight  rates. 

A  company  is  not  entitled  to  advanced  freight  rates  for 
the  purpose  of  creating  a  surplus  in  the  future,  over  and 
above  expenses,  and  a  reasonable  return  on  the  fair  value 
of  the  property,  with  which  to  build  improvements  of  a 
permanent  character;  whether  the  same  are  to  be  charged 
to  operating  expenses,  or  to  surplus,  or  to  capital. 


106  THE  ARGUMENT 

A  few  suggestions  in  support  of  the  foregoing  prin- 
ciples will  be  made  at  this  time.  Most  of  the  propositions 
we  have  suggested  are  so  elementary  as  not  to  need  dis- 
cussion. All  of  them  are  well  established  by  the  decisions 
of  this  Commission  and  the  Courts,  but  a  few  deserve 
special  consideration  because  of  their  vital  connection 
with  some  phases  of  the  present  investigation. 

INTERCORPORATE  RELATIONS. 

It  is  necessary  to  consider  system  figures,  and  not  those 
of  a  subsidiary,  in  making  an  analysis  of  financial  returns. 
Where  time  permitted  us  in  our  work,  we  have  tested  the 
validity  of  a  showing  for  a  given  company  with  the  sys- 
tem figures.  Where  such  are  not  given  in  our  exhibits, 
we  frankly  state  that  system  figures  should  be  used  to  find 
the  net  result  in  the  entire  territory  served  by  such  sys- 
tem, and  under  the  circumstances  surrounding  the  said 
railroad.  The  arbitrary  division  of  receipts  and  earnings 
between  companies  having  intercorporate  relationships, 
common  officers,  etc.,  is  a  notorious  source  of  possible  mis- 
representation, which  may  be  either  intentional  or  other- 
wise. 

A  striking  example  of  the  possibilities  of  this  character 
was  given  in  the  testimony  of  an  exhibit  of  Mr.  Chambers, 
who  showed  that  the  Dubuque  &  Sioux  City  maintenance, 
as  reported  to  the  Iowa  Railroad  Commission,  amounted 
to  $3,405  per  car  per  year,  being  enough  to  buy  three  or 
four  new  cars  per  year,  as  compared  with  the  maintenance 
on  the  Burlington  of  $114;  the  maintenance  per  locomo- 
tive on  the  Dubuque  &  Sioux  City  amounted  to  over 
$10,000,  as  compared  with  $3,200  on  the  Burlington.  If 
the  Dubuque  &  Sioux  City  had  the  same  number  of  cars 
and  locomotives  in  proportion  to  its  traffic  as  the  Burling- 
ton, then  the  maintenance  per  freight  car  last  year  on 
that  railroad  would  have  been  72%  greater  and  the  main- 


THE  ARGUMENT  107 

tenance  per  locomotive  60%  greater  than  that  of  the  Bur- 
lington.   (Chambers'  Exhibit  1,  page  21.) 

The  Commission  itself  has  abandoned  groupings  in 
the  United  States  by  boundaries,  and  has  adopted  the 
grouping  by  systems. 

The  railways  in  the  Eastern  case  used  system  figures. 
The  Commission  in  its  1910  decision  adopted  system  fig- 
ures. The  possibilities  of  arbitrary  separation  of  earn- 
ings and  expenses,  misleading  in  effect,  are  apparent 
to  all. 

The  railroads  in  Official  Classification  Territory  used 
system  figures  in  presenting  their  exhibits  to  the  Com- 
mission. 

The  following  table  constitutes  a  concrete  demonstra- 
tion of  the  fallacious  deductions  that  can  be  made  from 
figures,  using  the  Sunset  Central  lines  instead  of  the  op- 
erations and  earnings  of  the  parent  company,  the  South- 
ern Pacific  Company.  We  have  used  all  the  Sunset  Cen- 
tral lines  named  in  Mr.  Wettling's  list  of  railroads,  for 
which  the  data  could  be  secured  from  the  preliminary 
abstract  of  the  Interstate  Commerce  Commission  for  the 
year  ending  June  30,  1913. 

COMPARISON  OF  THE  OPERATING  RATIOS  OF  THE  SOUTH- 
ERN PACIFIC  WITH  ITS  SUBSIDIARIES,  THE  SUNSET  CEN- 
TRAL LINES  (Reported  in  the  Preliminary  Abstract  of  Interstate 
Commerce  Commission),  WHICH  WERE  USED  BY  MR.  WET- 
TLING,  FOR  THE  YEAR  ENDED  JUNE  30,  1913. 

Sunset  Southern 

Central  Lines    Pacific  Co. 

Morgan's  Louisiana  &  Texas 84.19  57.35 

Louisiana  Western 67.94 

Texas  &  New  Orleans 88.03 

Galveston,  Harrisburg  &  San  Antonio  79.33 

Houston  &  Texas  Central 80.30 

Houston  East  &  West  Texas 75.50 


108  THE  ARGUMENT 

Authority:  I.  C.  C.  Preliminary  Abstract  of  Statistics 
of  Common  Carriers  for  year  ended  June  30,  1913, 
covering  roads  having  more  than  $1,000,000  revenues. 

It  will  be  noted  that  the  operating  ratio  of  the  South- 
ern Pacific  is  from  15  to  50%  less  than  its  own  subsidiary. 

The  following  table  again  illustrates  the  same  propo- 
sition. While  the  parent  company,  reflecting  all  factors 
going  into  the  system,  is  able  to  earn  9.62%,  two  of  its 
subsidiaries  are  earning  deficits  and  two  others  are  earn- 
ing less  than  2%  on  their  capitalization. 

COMPARISON  OF  THE  RATIOS  OF  NET  CORPORATE  INCOME  TO 
CAPITAL  STOCK  OUTSTANDING  OF  THE  SOUTHERN  PACIFIC 
WITH  ITS  SUBSIDARIES,  THE  SUNSET  CENTRAL  LINES  (Be- 
ing reported  in  the  Preliminary  Abstract  of  Interstate  Commerce 
Commission  covering  roads  having  revenues  exceeding  $1,000,000), 
WHICH  WERE  USED  BY  MR.  WETTLING  FOR  THE  YEAR 
ENDED  JUNE  30,  1913. 

Sunset  Southern 

Central  Lines    Pacific  Co. 

Morgan 's  Louisiana  &  Texas Deficit 

Louisiana  Western 17.84%  9.62% 

Texas  &  New  Orleans Deficit 

Galveston,  Harrisburg  &  San  Antonio  Deficit 

Houston  &  Texas  Central 0.23% 

Houston  East  &  West  Texas 1.55% 

A  person  cannot  reach  the  conclusion  that  those  sub- 
sidiaries in  themselves  were  unprofitable  to  the  system, 
because  of  the  figures  that  we  have  just  stated.  The  best 
demonstration  of  the  accuracy  of  this  statement  is  the 
experience  had  by  the  Northern  Pacific  Eailroad  Com- 
pany a  number  of  years  ago,  when  there  was  a  factional 
dispute  on  between  the  directors  and  stockholders. 

The  stockholders  of  the  Northern  Pacific  severely  criti- 
cized the  policy  of  the  board  of  directors  in  purchasing 
and  constructing  the  branch  lines.  A  committee  was  ap- 
pointed by  the  stockholders  and  by  the  board  of  directors. 


THE  ARGUMENT  109 

Elaborate  investigations  on  the  wisdom  of  the  branch 
line  policy  were  made.  Finally  the  directors  made  a 
formal  statement  to  the  stockholders,  in  which  a  careful 
analytical  discussion  was  given  in  regard  to  the  proper 
accounting  for  earnings  and  expenses  between  the  parent 
company  and  its  subsidiaries.  This  report  completely 
demonstrates  the  fallacy  of  apportioning  earnings  on  the 
mile  per  rate  basis.  It  shows  further  that  if  the  branch 
lines  are  credited  with  60%  of  the  earnings  from  the 
traffic  originating  on  the  branch  lines,  in  each  instance 
the  branch  line  was  shown  to  be  self-supporting  without 
seriously  affecting  the  net  revenue  or  net  rate  of  return 
to  the  main  line. 

This  report  of  the  Northern  Pacific  board  of  directors 
is  a  conclusive  demonstration  of  the  necessity  to  consider 
system  figures.  Extended  extracts  of  the  report  were 
introduced  in  record  in  this  case  and  are  given  in  the 
abstract.  The  Railroad  Securities  Commission,  appoint- 
ed by  the  President  of  the  United  States,  took  occasion 
to  make  special  mention  of  this  same  proposition  in  the 
following  words: 

"Where  a  railroad  controls  the  operations  of  an- 
other road  by  the  ownership  of  a  majority  of  its 
stock,  there  is  constant  danger  that  the  minority 
stockholders  will  not  be  fairly  treated.  The  road 
thus  purchased  has  become  part  of  a  large  system, 
and  is  operated  by  the  representatives  of  the  whole 
system.  It  is  almost  certain  that  the  advantage  of 
the  whole  will  be  preferred  to  the  separate  interests 
of  the  part  in  matters  of  operation,  traffic  and  finance. 

"Again,  the  existence  of  two  or  more  companies 
under  the  same  management,  having  separate  or- 
ganizations but  united  control,  invites  the  conceal- 
ment of  financial  transactions  by  the  shifting  of 
earnings  from  one  company  to  another. ' ' 

(Report  of  the  Railroad  Securities  Commission  to 
the  President,  1911,  p.  23.) 


110  THE  ARGUMENT 

ADDITIONS  AND  IMPROVEMENTS  OUT  OP  SURPLUS  EARNINGS 
SHOULD  NOT  BE  CAPITALIZED. 

It  is  unjust  to  compel  the  public  to  pay  a  reasonable  re- 
turn upon  the  investment  of  some  people  in  railroad  prop- 
erty, then  compel  the  public  to  build  additions,  better- 
ments and  improvements  on  that  property;  and  then  com- 
pel the  public  to  pay  a  return  on  what  it  has  built.  We 
want  these  betterments,  improvements  and  additions.  The 
public  needs  require  them,  but  we  want  the  railroad  peo- 
ple to  build  them  and  we  will  pay  a  return  upon  their 
value.  If  we  build  them  we  should  own  them.  No  Court  or 
Commission  will  ever  permanently  force  upon  the  Amer- 
ican people  the  obligation  to  build  railroad  property  for 
private  citizens,  and  then  pay  those  private  citizens  a  re- 
turn upon  what  the  public  constructs.  That  is  just  precise- 
ly what  the  railroad  companies  of  this  Western  district 
are  demanding.  There  is  the  crux  of  the  whole  fight.  They 
are  building  additions  and  betterments,  improving  their 
properties,  raising  them  to  a  higher  standard,  and  charg- 
ing the  same  to  operating  expenses  or  surplus  earnings. 

If  you  are  a  railroad  official,  your  problem  is  to  find 
out  how  to  get  the  largest  possible  returns  for  the  stock- 
holders now  and  in  future  years.  The  answers  to  most  of 
these  perplexing  questions  which  we  are  discussing  are 
very  simple.  Charge  just  as  high  rates  as  you  can  so  as 
not  to  interfere  with  the  general  movement  of  traffic.  Do 
not  pay  over  4.5%  on  your  debts  and  pay  just  as  much  less 
as  possible.  Make  the  public  raise  your  property  to  a 
higher  standard.  Make  the  public  build  betterments,  im- 
provements and  additions  and  charge  them  to  operating 
expenses  or  to  surplus.  Issue  just  as  few  stocks  as  pos- 
sible. The  more  the  property  is  built  out  of  operating 
expenses,  surplus  income,  or  bonds,  the  more  profits  will 
inure  to  the  stockholders. 

Precisely  the  same  results  are  accomplished  whether 
you  build  improvements  and  charge    to  operating    ex- 


THE  ARGUMENT  111 

penses,  or  surplus.  You  are  compelling  the  traffic  in  one 
year  to  bear  the  burden  of  an  improvement,  whose  cost 
should  be  spread  over  the  life  of  the  improvement.  If  the 
owners  of  a  railroad  are  receiving  an  adequate  return 
upon  their  property,  it  is  axiomatic  that  they  should  not 
have,  in  addition  to  such  return,  a  surplus  for  the  purpose 
of  building  improvements  and  additions,  and  at  the  same 
time  have  a  return  upon  such  improvements  and  additions 
built  out  of  surplus.  Either  they  should  be  denied  a 
return  on  such  construction  out  of  surplus;  or  else  they 
should  be  denied  the  surplus.  Both  certainly  cannot  be 
permitted  to  continue. 

REPRESENTATIVE  RAILROADS. 

There  is  an  apparent  decline  in  ratio  in  net  operating 
income  to  book  value  on  a  few  of  the  western  railroads, 
a  notable  example  of  which  is  the  North  Western  Bail- 
way.  If  the  accounting  rules,  and  new  construction, 
throughout  a  period  of  years  remain  substantially  con- 
stant, there  would  be  occasion  for  a  showing  of  that  char- 
acter to  have  great  weight  in  the  mind  of  a  disinterested 
party. 

All  persons  acquainted  with  the  facts  freely  concede 
there  have  been  changes  of  the  character  to  which  we 
have  referred.  The  difference  in  opinion  comes  from  the 
weight  to  be  attached  to  these  changes.  Without  citing 
the  effect  of  the  changes,  and  without  any  intent  to  in- 
vestigate and  analyze  the  facts  from  which  such  a  deduc- 
tion might  be  made,  the  carriers  boldly  assert  that  these 
changes  have  had  no  substantial  effect. 

In  former  cases  before  the  Commission,  we  have  at- 
tempted to  show  the  large  importance  of  these  factors, 
but  because  of  lack  of  facilities,  we  have  been  unable  to 
make  a  critical  analysis  of  the  situation. 

It  is  possible,  of  course,  that  conditions  may  be  entire- 
ly different  in  the  east  and  the  west,  and  even  if  we  had 


112  THE  ARGUMENT 

been  able  to  make  the  analysis  in  the  east,  it  might  have 
resulted  differently  from  what  we  find  in  the  west. 

In  this  Western  Case  we  have  undertaken  to  make  a 
somewhat  extensive  analysis  of  the  situation  as  to  the 
effect  of  these  changes.  This  task  is  complicated  tre- 
mendously for  several  reasons;  the  many  important 
changes  in  accounting  during  the  reconstruction  period, 
through  which  the  carriers  have  been  passing;  the  enor- 
mous amount  of  new  construction;  the  raising  of  the 
standard  of  their  maintenance  of  properties;  extending 
their  lines  into  new  territories  in  the  northwest  and  south- 
west; and  the  intercorporate  relationships  with  other 
companies. 

We  quickly  found  it  would  be  impossible  to  make  even 
an  approach  at  a  careful  analysis  of  the  financial  condi- 
tion of  all  the  railroads  in  the  territory.  We  thought 
it  would  be  wiser  to  make  a  superficial  analysis  of  all  the 
railroads,  presenting  their  surface  figures,  as  given  in 
their  reports,  without  making  any  revision  because  of 
changes  in  the  accounting  rules  of  the  Commission,  or 
the  policies  of  the  carriers,  supplemented  by  a  somewhat 
more  extended  analysis  of  a  few  representative  com- 
panies in  the  Northwestern  group  of  states,  where  the 
bulk  of  the  advances  occur,  selecting  one  representative 
typical  carrier,  for  an  intensive  study  of  these  various 
factors,  and  what  effect  they  have  had. 

A  somewhat  puzzling  situation  gradually  becomes  clear 
as  a  result  of  this  analysis.  What  appears  to  be  a  strange 
inconsistency  is  found  simply  to  be  the  result  of  a  change 
in  bookkeeping  and  a  change  in  the  amount  of  construc- 
tion that  is  going  on.  It  was  difficult  to  explain  why  such 
bookkeeping  results  were  obtainable  in  spite  of  the  fact 
that  the  credit  of  these  companies  was  improving;  they 
were  raising  the  standard  of  maintenance  of  their  prop- 
erties, and  their  gross  earnings  and  net   earnings   sur- 


THE  ARGUMENT  113 

passed   any  in   their   former   history.    When  a  proper 
analysis  is  made  the  situation  explains  itself. 

The  task  of  analyzing  the  conditions  of  some  forty  rail- 
roads covering  a  large  portion  of  the  continent,  one  rail- 
road keeping  its  accounts  quite  differently  from  another 
in  some  particulars,  one  allowing  6%  for  depreciation  and 
another  a  half  of  1%,  one  going  through  a  process  of  re- 
construction, another  deferring  its  maintenance,  some 
closely  inter-related  with  others  by  intercorporate  con- 
nections— all  these  factors  tend  to  confuse  the  situation. 

Consolidated  average  figures  are  interesting  and  sug- 
gestive, but  in  order  to  test  the  credence  to  be  attached 
to  them,  it  is  well  for  a  more  extended  analysis  to  be 
made  of  one  or  a  few  representative  railroads.  In  the 
past  this  has  been  the  custom  of  the  Interstate  Commerce 
Commission;  it  was  in  all  three  advanced  rate  cases  in 
1910.  It  has  been  the  custom  of  the  Supreme  Court  of 
the  United  States  in  practically  all  of  the  very  important 
rate  cases,  even  where  they  concern  all  the  carriers  in  a 
given  state. 

In  the  Western  Advance  Rate  Case,  you  treated  the 
Santa  Fe  and  the  Burlington  as  standard  roads  through- 
out that  inquiry  "by  which  to  make  measurement." 
Western  Advance  Rate  Case,  20  I.  C.  C,  307,  376.  You 
also  made  frequent  reference  to  other  railroads  in  the 
territory,  but  more  extended  analyses  of  those  two  com- 
panies were  made. 

In  this  investigation  we  have  added  a  company  to  those 
just  named.  We  have  selected  the  North  Western  Rail- 
way as  another  typical  carrier  in  the  territory  for  several 
reasons : 

The  North  Western  Railway  has  led  the  fight  for  the 
Western  railroads. 

Ninety  per  cent  of  the  North  Western's  mileage  is  lo- 
cated in  the  states  primarily   involved,   North   Dakota, 


114  THE  ARGUMENT 

South  Dakota,  Nebraska,  Minnesota,  Iowa,  Illinois  and 
Wisconsin.  Although  there  are  but  few  advances  locally 
in  Illinois  and  Wisconsin,  to  Chicago  and  Milwaukee, 
yet  the  vast  bulk  of  the  traffic  moving  into  these  cities 
would  be  affected  by  the  advances. 

The  North  Western  will  be  shown  to  be  very  represent- 
ative of  the  entire  group  of  railroads  in  the  northwest  in 
regard  to  its  traffic  density  and  earnings. 

THE  BASIS. 

Various  bases  have  been  adopted  by  this  Commission 
and  by  the  courts  from  time  to  time  for  the  purpose  of 
testing  the  adequacy  of  revenues.  In  the  framing  of 
these  different  methods,  certain  elementary  principles 
have  been  laid  down.  We  find  these  doctrines  gradually 
developing  and  crystallizing  without  much  substantial 
modification  or  change  in  the  principles  themselves.  Al- 
though the  tests  proposed  have  been  quite  different  in 
different  cases,  yet  the  principles  have  remained  quite 
constant  without  alterations  of  any  substantial  character. 

The  Supreme  Court  of  the  United  States  in  Smyth  v. 
Ames,  169  U.  S.  466,  laid  down  a  principle  that  the  basis 
of  all  computations  as  to  reasonableness  of  rates  shall  be 
the  fair  value  of  the  property  devoted  to  public  service. 
The  definition  of  the  elements  going  into  fair  value  was 
left  in  quite  an  indefinite  shape  by  the  court  in  that  de- 
cision. Since  then  the  principles  therein  enunciated  have 
been  gradually  evolved,  developed  and  interpreted.  After 
all,  it  is  well  that  hard  and  fixed  rules  were  not  laid  down 
at  that  time,  because  it  has  only  been  by  the  slow  process 
of  discussion  and  investigation  that  wise  principles  have 
been  developed.  Some  have  said  that  the  basis  outlined 
by  the  Supreme  Court  in  Smyth  v.  Ames,  supra,  was  for 
the  testing  of  whether  rates  were  confiscatory  or  not,  and 
it  was  not  intended  to  apply  that  basis  to  the  work  of  a 
Commission  in  determining  whether   rates   are   reason- 


THE  ARGUMENT  115 

able  or  not.  We  do  not  believe  that  position  is  correct. 
We  would  rather  believe  that  the  rate  of  return,  after  the 
fair  value  is  arrived  at,  would  vary  when  investigating 
whether  rates  were  confiscatory,  or  whether  rates  were 
adequate  and  reasonable.  In  some  cases  the  Supreme 
Court  has  upheld  earnings  of  2%  and  3%  as  not  being 
confiscatory.  But  a  Commission  would  not  hold  those  to 
be  adequate.  The  fundamental  doctrine  going  into  the 
determination  of  fair  value  should  apply  in  both  cases. 
The  fact  is,  the  case  of  Smyth  v.  Ames,  supra,  has  been 
adopted  constantly  by  state  Commissions  and  courts 
since  then,  for  the  purpose  of  determining  adequacy  of 
revenues.  This  Commission  itself  has  used  the  doctrine 
there  laid  down  in  urging  Congress  to  give  facilities  to 
the  Commission  to  determine  the  fair  value  of  railroad 
properties  for  the  very  purpose  of  the  consideration  of 
the  reasonableness  of  rates.  A  fact  of  importance  to 
note,  in  this  connection,  is  that  the  railroads  on  the  very 
eve  of  making  that  valuation,  are  practically  rendering 
it  worthless  for  the  purposes  for  which  it  was  intended. 
They  are  determining  issues  that  should  not  be  deter- 
mined until  that  valuation  is  found.  It  may  be  that  in 
some  cases,  that  necessity  has  been  established.  This 
may  be  true  in  the  Southwestern  Case,  in  what  we  have 
called  the  Southwestern  Case  of  1910 — the  case  of  Texas 
Railroad  Commission  v.  Atchison,  Topeka  &  Santa  Fe 
Railroad  Company,  et  al.,  20  I.  C.  C,  463.  The  same 
thing  may  have  been  true  in  the  Eastern  Advance  Rate 
Case,  decided  in  1914.  However  that  may  be,  we  will 
now  proceed  to  consider  various  other  tests  that  have 
been  suggested. 

Any  general  averages  including  the  rate  of  earnings 
on  the  book  value  of  property  of  companies  guilty  of  mis- 
management and  high  finance,  cannot  be  accepted  as  a 
basis  for  advancing  their  freight  rates. 

By  that  act  you  would  place  your  seal  of  approval  upon 


116  THE  ARGUMENT 

the  high  finance  and  mismanagement  of  such  properties 
as  the  Chicago  &  Alton,  and  the  Frisco,  whose  reckless 
violation  of  principles  that  are  reasonable  and  right, 
have  made  them  notorious  on  both  sides  of  the  ocean. 

By  adopting  the  so-called  property  investment  of  all 
these  companies,  combined,  as  a  basis  for  determining 
the  adequacy  of  railroad  revenues  in  this  territory,  you 
will  be  placing  your  seal  of  approval  upon  the  fictitious 
capitalization  that  has  been  reflected  in  the  property  in- 
vestment of  these  companies  and  others  like  the  Missouri 
Pacific  and  the  Missouri,  Kansas  &  Texas.  The  uncontra- 
dicted, undisputed  evidence  of  Mr.  Lauck,  a  gentleman 
gathering  his  data  from  the  official  reports  of  stockhold- 
ers' committees,  and  boards  of  directors  and  financial 
documents,  shows  these  facts  for  a  dozen  of  these  West- 
ern railroads.  Mr.  Lauck  gave  his  authorities  as 
follows : 

"The  sources  are  the  general  sources  for  the  basis 
of  this  investigation,  the  reports  of  the  railroads  to 
the  Interstate  Commerce  Commission,  the  stockhold- 
ers '  reports,  Poor's  Manual,  the  Commercial  &  Fi- 
nancial Chronicle."  (tr.  13530.) 

The  railroads  had  the  right  and  opportunity  to  ques- 
tion the  details  entering  into  those  totals  for  any  of  those 
companies;  they  later  had  the  right  on  rebuttal  to  dis- 
prove those  facts  by  other  witnesses,  had  they  so  de- 
sired. They  did  neither.  They  may  not  have  a  whole- 
some respect  for  the  chief  witness  for  their  employes  in 
the  recent  wage  dispute,  but  that  does  not  affect  this 
record.  The  elaborate  statistical  data  in  support  of 
those  conclusions  were  tendered  as  exhibits  before  the 
case  closed.  When  so  tendered,  Mr.  Wright,  for  the  rail- 
roads, objected  in  direct  violation  of  his  formal  agree- 
ment made  of  record  in  the  following  language : 

"Mr.  Wright:  Before  commencing,  Mr.  Commis- 
sioner, I  overlooked  the  fact  that  there  are  some  other 


THE  ARGUMENT  117 

exhibits  of  general  statistical  matter  which  were 
used  before  the  Railway  Arbitration  here  which  I 
will  desire  to  submit,  on  the  question  of  the  financial 
needs  of  the  railroads.  I  will  submit  copies  of  them 
to  Mr.  Thome  and  others  in  the  course  of  the  day, 
so  that  that  can  be  done  later.  They  are  of  a  gen- 
eral character,  and  I  think  will  not  require  much 
cross-examination. 

"Mr.  Thorne:  Your  Honor,  I  would  like  to  have 
the  same  privilege  with  reference  to  the  exhibits  in- 
troduced by  the  Employes  in  the  same  hearing. 

1 '  Mr.  Wright :  We  will  be  glad  to  have  them  intro- 
duced also  if  they  so  desire. "    ( tr.  846. ) 

The  railroads  had  copies  of  these  exhibits  in  their  pos- 
session all  the  time.  They  could  have  readily  verified,  of 
corrected,  or  contradicted,  or  qualified  any  fact  therein 
stated.  They  did  not  do  so.  That  remains  the  undis- 
puted, uncontradicted  record  in  this  case  and  we  challenge 
any  person  to  show  an  error  of  any  substantial  char- 
acter in  the  analysis  of  property  investment  made  by 
this  witness.  Further,  this  fictitious  capitalization  and 
exaggerated  book  value  which  these  gentlemen  are  now 
parading  before  the  public  under  the  sonorous  expres- 
sion "property  investment,"  is  common  knowledge. 

Further,  this  evidence  as  to  the  fictitious  capitalization 
and  property  investment  is  confirmed  by  other  portions 
of  this  record,  and  by  decisions  of  this  Commission. 

We  are  not  compelled  to  rely  upon  Mr.  Lauck's  testi- 
mony alone.  There  is  abundant  confirmation  of  the  sub- 
stantial accuracy  of  his  figures  on  this  part  of  the  case. 


DIFFERENT  TESTS. 

Several  bases  have  been  widely  discussed  in  determin- 
ing whether  any  given  amount  of  return  is  sufficient. 


118  THE  ARGUMENT 

RAILROAD  TEST:    PROPERTY  INVESTMENT. 

Book  value  of  cost  of  road  and  equipment,  which  is  the 
so-called  property  investment,  is  the  basis  upon  which 
the  carriers  practically  rest  their  case. 

THE  SO-CALLED  "PROPERTY  INVESTMENT"  FIGURES,  RELIED 
UPON  BY  THE  CARRIERS  IN  THIS  PROCEEDING  INCLUDES 
HUNDREDS  OF  MILLIONS  OF  DOLLARS  OF  VALUES,  UPON 
WHICH  THEY  ARE  NOT  ENTITLED  TO  RELY  AS  A  JUSTIFI- 
CATION FOR  AN  ADVANCE  IN  FREIGHT  RATES. 

One  Hundred  Million  Dollar  Excess  in  "Property  In- 
vestment" of  Santa  Fe — the  Uncontradicted  Evidence  in 
this  Case. 

The  testimony  of  Mr.  Powell,  concerning  the  $100,000,- 
000  excess  property  investment,  as  well  as  capitalization, 
of  the  Atchison,  Topeka  &  Santa  Fe  Railway  Company 
(tr.  4774)  remains  the  uncontradicted,  undisputed  evi- 
dence in  this  case. 

Eighty  Million  Dollars  Excess  in  "Property  Invest- 
ment" of  M.,  K.  &  T.  According  to  the  Interstate  Com- 
merce Commission. 

In  1910  this  Commission  eliminated  over  $80,000,000  in 
the  capitalization  and  property  investment  of  the  Mis- 
souri, Kansas  &  Texas  Ry.  Co.;  before  you  compared 
the  earnings  with  property  investment,  in  order  to  de- 
termine the  adequacy  of  revenues  of  that  property. 
(Texas  Railroad  Commission  v.  A.  T.  &  S.  F.,  20  I.  C.  C. 
463.)  That  decision  further  confirms  the  statement  and 
testimony  to  which  we  have  referred. 

One  Hundred  Million  Dollar  Excess  in  the  "Property 
Investment"  of  the  Burlington  Railroad,  According  to 
ike  Interstate  Commerce  Commission. 


THE  ARGUMENT  119 

"PROPERTY  INVESTMENT." 

The  railroads  are  practically  resting  their  case  upon 
their  so-called  " Property  Investment,"  which  is  their 

book  cost,  or  book  value,  of  road  and  equipment.    We  be- 
lieve this  attempt  is  fundamentally  wrong. 

This  Commission  in  the  last  Western  Advance  Rate 
Case,  that  of  1910,  declined  to  consider  $100,000,000  of  the 
11 property  investment"  of  the  Burlington  Railroad  as  a 
justification  for  an  advance  in  freight  rates.  This  will 
be  found  described  by  the  Commission  in  the  20th  Volume 
of  your  reports,  pages  337  and  338.  There  it  is  shown 
that  the  comptroller  of  the  company  testified  that  the  total 
investment  in  the  property  from  the  sale  of  stocks  and 
bonds  amounted  to  $258,000,000,  while  they  claimed  a  re- 
turn upon  $530,000,000. ' 'The  difference  between  these  two 
figures  represents  first,  investment  in  the  property  made 
out  of  earnings ;  second,  increased  value  of  right  of  way 
and  terminals  owned  by  the  company. ' '  In  other  words, 
all  but  $258,000,000  represented  improvements  out  of 
surplus  and  the  unearned  increment. 

Both  of  these  grounds  are  discredited  as  justifiable 
for  an  advance  in  rates  as  shown  in  pages  339  and  340. 

While  the  Burlington  in  the  1910  case,  was  in  fact  ask- 
ing a  return  upon  this  excess  amount  of  $272,000,000,  yet 
the  cost  of  road  and  equipment  at  that  time,only  amounted 
to  $364,000,000.  Consequently,  we  have  stated  that  you  re- 
fused to  accept  $106,000,000  as  a  justifiable  basis  for  an 
advance  in  the  freight  rates.  That  further  confirms  the 
testimony  to  which  we  have  made  reference.  Your  re- 
port as  to  the  Chicago  &  Alton,  as  to  the  Chicago,  Mil- 
waukee &  St.  Paul,  and  your  investigation  of  the  Frisco„ 
futher  confirms  the  testimony  and  statements  to  which 
we  have  referred. 


120  THE  ARGUMENT 

The  propositions  that  we  are  discussing  as  to  the  excess 
capitalization  and  property  investment  over  fair  value 
entitled  to  a  return,  are  further  confirmed  by  state  valua- 
tions which  have  been  made  by  various  Western  states, 
and  which  were  introduced  in  this  record  in  this  case, 
not  by  the  state  commissions,  but  by  the  chief  counsel  for 
the  railroads  in  an  effort  to  offset  certain  figures  that 
were  introduced  by  Mr.  Jurgensen. 

TWO  HUNDRED  MILLION  DOLLAR  EXCESS  IN  PROPERTY  IN- 
VESTMENT OF  RAILROADS  IN  WISCONSIN  AND  MINNESOTA 

The  so-called  property  investment  of  the  interstate  rail- 
roads, parties  to  this  case,  which  serve  the  states  of  Wis- 
consin and  Minnesota,  have  been  valued  by  those  states. 
These  valuations  have  been  determined  by  disinterested 
parties,  not  for  the  trial  of  this  proceeding,  but  in  order 
to  test  the  adequacy  of  state  made  rates.  These  will  be 
further  discussed  under  another  subject;  suffice  it  to  say 
at  this  time  that  the  excess  property  investment  in  those 
two  states,  over  their  present  value,  aggregates  approxi- 
mately $200,000,000. 

FIVE  HUNDRED  MILLION  DOLLAR  EXCESS  IN  PROPERTY  IN- 
VESTMENT OF  RAILROADS  IN  FIVE  STATES,  ACCORDING  TO 
SWORN  TESTIMONY  OF  CHIEF  ENGINEER  FOR  MINNE- 
SOTA STATE  COMMISSION. 

Mr.  D.  F.  Jurgensen,  Chief  Engineer  for  the  Minnesota 
Railroad  &  Warehouse  Commission,  an  engineer  of  some 
15  or  20  years'  experience,  has  used  the  basic  data  that 
has  been  compiled  in  five  Western  states  in  connection 
with  their  valuations,  this  including  the  two  mentioned 
above.  A  description  and  summary  of  his  work  will  be 
given  elsewhere.  At  this  time  it  is  sufficient  to  say  that 
these  valuations,  compiled  upon  a  common  basis  adopted 
by  Mr.  Jurgensen,  show  an  excess  property  investment 
compared  to  present  value  of  the  same  properties, 
amounting  to  over  $500,000,000. 


THE  ARGUMENT  121 

PROPERTY  INVESTMENT  REPUDIATED  BY  THIS  COMMISSION 
IN  1908. 

In  your  annual  report  to  Congress  for  the  year  1908, 
page  85,  you  stated:  "This  is  no  place  to  enter  upon  an 
extended  criticism  of  the  practice  of  American  railways 
in  the  matter  of  their  property  accounts,  nor  is  such  a  crit- 
icism necessary  for  the  purpose  in  hand.  It  is  sufficient  to 
refer  to  the  well-known  fact  that  no  court,  or  commission, 
or  accountant,  or  financial  writer  would  for  a  moment 
consider  that  the  present  balance  sheet  statement  purport- 
ing to  give  the  'cost  of  property'  suggests,  even  in  a  re- 
mote degree,  a  reliable  measure  either  of  money  invested 
or  of  present  value. ' ' 

PROPERTY  INVESTMENT  DISCREDITED  IN  1914  BY  THE  INTER- 
STATE COMMERCE  COMMISSION. 

The  following  is  an  extract  from  your  decision  in  the 
Five  Per  Cent  Case : 

' '  While  the  property  investment  accounts  are  used 
herein  for  the  purpose  of  comparison  it  must  be 
understood  that  they  are  not  accepted  by  the  Com- 
mission as  evidence  either  of  the  actual  cost  or  the 
present  value  of  these  properties. ' ' 

The  Five  Per  Cent  Case,  31 1.  C.  C.  351,  361. 

SINCE  1907  MILLIONS  OF  DOLLARS  HAVE  BEEN  ADDED  TO  PROP- 
ERTY INVESTMENT  AS  OF  THAT  DATE,  THAT  CANNOT  BE 
CONSIDERED  AS  A  JUSTIFICATION  FOR  AN  ADVANCE  IN 
FREIGHT  RATES. 

The  carriers  repeatedly  stated  on  the  stand  that  they 
have  been  building  betterments,  improvements  and  addi- 
tions out  of  surplus  earnings,  which  they  had  charged  to 
property  investment ;  but  they  did  not  state  the  amount. 
Since  1907  the  railroads  in  this  case  have  added  over  one 
billion  dollars  to  their  property.    Because  of  the  condi- 


122  THE  ARGUMENT 

tion  of  the  record  we  cannot  state  what  portion  of  this 
came  from  surplus,  but  very  large  sums,  aggregating 
$28,000,000  on  one  railroad,  for  instance,  have  been  so 
built. 

This  Commission  specifically  declined  in  1910  to  con- 
sider the  values  of  properties  which  the  public  builds  for 
the  carriers,  as  a  part  of  the  property  upon  which  they 
can  demand  an  advance  in  freight  rates.  (Eastern  Ad- 
vance Rate  Case,  20  I.  C.  C.  243 ;  Western  Advance  Rate 
Case,  20  I.  C.  C.  307;  Texas  Railroad  Commission  v.  At- 
chison, Topeka  &  Santa  Fe,  20  I.  C.  C,  463.) 

The  two  leading  railroad  presidents  who  testified  in 
1910,  President  Willard,  of  the  Eastern  railroads,  and 
President  Ripley,  of  the  Western  railroads,  also  speci- 
fically stated  they  would  not  claim  a  return  upon  better- 
ments and  improvements  built  out  of  surplus  earnings. 
The  said  extracts  from  their  testimony  have  been  made  a 
part  of  the  record  in  this  case. 

In  spite  of  the  three  unanimous  decisions  of  this  Com- 
mission in  1910,  where  the  proposition  was  thoroughly  and 
clearly  considered  and  decided — in  spite  of  the  declara- 
tion of  the  two  leading  railroad  presidents  in  the  1910 
Advance  Rate  Case, — in  spite  of  the  declaration  of  this 
Commission  in  the  original  Five  Per  Cent  case, — these 
carriers  are  here  today  relying  upon  this  property  invest- 
ment, which  has  been  so  thoroughly  discredited,  a  prop- 
erty investment  which  this  record  conclusively  shows  con- 
tains hundreds  of  millions  of  dollars  in  excess  values  not 
entitled  to  any  consideration  in  this  case.  The  amounts 
that  were  wrongly  charged  to  the  property  investment 
account  prior  to  1907,  are  still  in  those  accounts,  and  since 
1907  you  have  the  additions  and  betterments  built  out  of 
surplus. 

We  do  not  believe  this  Commission  is  ready  now  to 
reverse  itself  on  this  issue  and  to  adopt  as  a  basis  for 
conclusions,  figures  which  include  several  hundred  mil- 


THE  ARGUMENT  123 

lion  dollars  which  you  have  previously  held  cannot  be 
used  to  justify  increases  in  rates. 

We  do  not  believe  this  Commission  has  abandoned  those 
basic  doctrines  which  have  become  established  in  these 
former  cases.  A  showing  of  percentage  return  on  prop- 
erty investment  is  of  little  or  no  significance  in  this  pro- 
ceeding as  indicative  of  the  adequacy  or  inadequacy  of 
revenues. 

LANE  TEST. 

Mr.  Lane  suggested  the  actual  sacrifice  of  the  investor 
as  properly  the  true  basis,  if  it  could  be  secured.  This  in- 
cluded the  original  cost,  plus  deferred  profits.  This  factor 
is,  of  course,  extremely  difficult  to  secure.  Mr.  Lane  also 
gave  a  very  comprehensive  analysis  of  the  whole  railroad 
situation  over  an  extended  period  of  years. 

RAILROAD  SECURITIES  COMMISSION  TEST. 

Railway  credit  is  constantly  referred  to  in  the  cases. 
This  was  suggested  as  the  true  basis  by  the  Railroad 
Securities  Commission  appointed  by  President  Taft. 

PROUTY  TEST. 

The  reasonable  return  on  capitalization,  providing  the 
said  capitalization  does  not  exceed  the  fair  value  of  the 
property,  we  will  refer  to  as  the  Prouty  basis.  It  is  a 
practical  application  of  railway  credit  as  the  basis  for 
conclusions,  until  the  valuation  of  the  properties  is  act- 
ually arrived  at  by  the  Commission. 

SUPREME  COURT  TEST. 

Present  fair  value  is  the  basis  laid  down  by  the  Su- 
preme Court  of  the  United  States  for  all  computations 
as  to  the  reasonableness  of  rates. 


124  THE  ARGUMENT 

We  will  apply  these  various  bases  to  the  facts  pre- 
sented of  record,  so  far  as  time  will  permit. 

The  public  is  primarily  interested  in  seeing  that  these 
carriers  shall  have  adequate  funds  to  maintain  their 
properties.  This  comes  first  in  importance,  before  any 
test  is  made  of  the  adequacy  of  the  profits. 


I. 


WESTERN  RAILROADS  HAVE  ADEQUATE  FUNDS  WITH  WHICH 
TO  MAINTAIN  THEIR  PROPERTIES. 

Fully  realizing  the  basic  and  fundamental  character  of 
the  two  issues  relating  to  maintenance  and  to  credit,  it 
was  our  original  purpose  to  give  very  extended  considera- 
tion to  both  of  these  subjects.  This  was  especially  true 
in  view  of  the  fact  that  the  carriers  in  the  East  had 
claimed  their  inability  to  properly  maintain  their  prop- 
erties; also  to  the  fact  that  the  Western  railroads  had 
flooded  the  Western  newspapers  with  paid  advertisements 
to  the  effect  that  they  had  been  unable  to  maintain  their 
properties. 

President  Bush  of  the  Missouri  Pacific,  and  President 
Felton  of  the  Chicago  Great  Western,  conceded  the  fact 
that  their  maintenance  was  of  a  higher  standard  than  for- 
merly. Mr.  Wettling  confirmed  this  for  the  roads  gener- 
ally,   (tr.  454,  214,  778,  779.) 

The  most  important  and  fundamental  concession  made 
by  the  carriers  in  the  Western  Advance  Rate  Case  was  in 
connection  with  this  subject  of  maintenance.  By  Mr. 
Wright's  concession,  at  the  beginning  of  the  introduction 
of  the  evidence  by  the  prote§tants,  that  they  were  able  to 
adequately  maintain  their  properties,  he  eliminated  the 
necessity  for  consuming  much  time  on  this  issue. 

The  circumstances  surrounding  the  concession  may  be 
briefly  described  as  follows: 

Mr.  Ellis  had  introduced  an  exhibit  containing  quite 


126  MAINTENANCE 

extended  statistics  relative  to  the  maintenance  of  rail- 
roads in  the  Western  district,  with  some  introductory  and 
explanatory  comments  attached  to  the  said  tables.  It  was 
our  plan  to  supplement  these  tables  with  a  further  anal- 
ysis, going  more  into  detail  of  the  proof  of  the  ability  of 
Western  carriers  to  maintain  their  properties,  as  we  had 
formerly  done  in  the  Eastern  Case. 

Mr.  Ellis  was  offered  as  a  witness,  not  as  to  text  matter 
contained  in  the  exhibits,  but  as  to  the  accuracy  of  the 
statistics  contained  in  the  exhibits. 

These  exhibits  showed  that  the  Western  railroads  had 
been  making  very  large  and  substantial  increases  in  their 
maintenance  expenditures,  raising  the  standard  of  their 
properties  to  a  higher  level. 

At  the  conclusion  of  Mr.  Ellis's  testimony  Mr.  Wright 
demanded  the  opportunity  to  cross-examine  some  one  on 
the  text  accompanying  the  figures  in  the  exhibit  offered. 
A  gentleman  offered  himself  for  that  purpose;  but  Mr. 
Wright 's  ardor  to  cross-examine  suddenly  cooled,  and  he 
declined  to  make  any  cross-examination  except  to  ask  the 
question :  Where  had  any  of  the  railroads  claimed  they 
were  unable  to  maintain  their  properties?  Then  ensued 
the  following: 

"Mr.  Wright:  Who  in  this  case  is  claiming  that 
they  have  not  had  the  money  to  keep  up  their  prop- 
erty f- 

"Mr.  Thorne:  In  the  paid  advertisements  in 
Iowa. 

"Mr.  Wright:  We  have  not  had  any  paid  adver- 
tisements and  nobody  in  this  case  has  had  any  con- 
nection with  them.  Is  there  anybody  in  this  case  that 
has  made  that  contention? 

"Mr.  Walter :  Let  us  waive  that.  Do  you  say  you 
have  the  money  ? 

1  i  Mr.  Wright :  Yes,  we  have  maintained  our  prop- 
erties and  we  expect  to.  I  never  made  any  contention 
of  that  kind  in  this  case,  and  so  far  as  any  advertise- 


MAINTENANCE  127 

ment  in  Iowa  is  concerned,  nobody  connected  with 
this  case  in  the  handling  of  it  has  anything  to  do 
with  it. 

' ' Mr.  Walter:  My  purpose  in  rising  was  to  get  for- 
mally on  the  record  the  admission  you  do  have  the 
required  money  to  keep  your  property  in  the  shape 
which  you  think  it  ought  to  be  in. 

"Mr.  Wright:  Yes,  I  am  not  going  back  on. that." 
(tr.  4663,  4664.) 

At  no  stage  of  the  record  was  there  any  serious  claim 
made  by  the  carriers  contrary  to  the  foregoing  concession 
made  by  Mr.  Wright,  the  chairman  of  the  committee  on 
behalf  of  the  carriers.  Consequently  this  relieves  us  of  a 
heavy  burden,  and  we  will  not  consume  further  time  in 
discussion  of  this  issue. 


II. 


THE  SECURITIES  OF  REPRESENTATIVE  WESTERN  RAILROADS 
ARE  MORE  ATTRACTIVE  TO  THE  INVESTING  PUBLIC  THAN 
THOSE  OF  COMPANIES  ENGAGED  IN  ANY  OTHER  LINE  OF 
INDUSTRY  IN  THE  UNITED  STATES. 

"Must  we  not  for  the  larger  public  interest,  what- 
ever may  be  thought  by  this  or  that  shipper,  make 
the  business  of  financing  railroad  transportation  so 
desirable  to  the  investor  that  the  necessary  funds  for 
betterments  and  extensions  will  soon  be  forth- 
coming. ' ' 

Hon.  Martin  A.  Knapp. 
One  basis  for  the  determination  of  the  adequacy  of  the 
revenues  of  a  public  service  corporation  exists,  which  is 
closely  related  to  all  of  the  other  issues  in  the  case.  The 
credit  of  a  company  reflects  the  judgment  of  actual  in- 
vestors as  to  the  prosperity  of  such  a  company;  and 
further,  it  accurately  portrays  the  ability  of  that  com- 
pany to  secure  additional  capital.  For  these  two  reasons 
railway  credit  is  one  of  the  most  basic  issues,  if  not  the 
fundamental  issue,  until  this  Commission  has  completed 
the  gigantic  task  of  appraisement  of  American  railways. 

"We  hear  much  about  a  reasonable  return  on 
capital.  A  reasonable  return  is  one  which  under 
honest  accounting  and  responsible  management  will 
attract  the  amount  of  investors'  money  needed  for 
the  development  of  our  railroad  facilities.  More 
than  this  is  an  unnecessary  public  burden.  Less 
than  this  means  a  check  to  railroad  construction  and 
to  the  development  of  traffic. ' ' 

Railroad  Securities  Commission. 


CREDIT  129 

These  railroads  are  not  relying  upon  the  European 
War.  They  do  not  claim  that  they  were  unable  to  meet 
their  operating  expenses,  taxes,  or  interest  on  debts. 
They  are  not  asking  additional  money  for  these  purposes. 
What  other  reasons  have  they  for  demanding  more 
money?  They  do  not  claim  in  this  case  a  lack  of  funds 
to  properly  maintain  their  property. 

The  carriers  say  they  do  not  have,  and  cannot  secure, 
the  money  with  which  to  build  additions  and  betterments, 
and  to  improve  their  properties  as  they  should,  and  as 
the  public  demands. 

There  are  two  sources  from  which  this  money  can 
come: 

1.  They  can  build  additions  and  betterments  out  of 
current  earnings,  charging  part  to  operating  expenses, 
and  part  to  surplus,  (Felton,  tr.  164) ;  or 

2.  They  can  construct  them  out  of  capital. 
Structures  of  that  character  should  be  built  out  of 

capital,  and  not  out  of  current  earnings. 

Railroads  are  not  entitled  to  demand  that  freight  rates 
shall  be  so  high  that  they  can  pay  a  reasonable  return 
on  the  present  value  of  their  property,  and  then  have 
additional  earnings  with  which  they  can  add  permanent 
revenue  producing  improvements  to  that  property.  This 
proposition  is  well  established  in  the  decisions  of  the 
courts  and  of  this  Commission. 

However,  railroads  that  are  properly  capitalized, 
reasonably  well  located,  and  operated,  are  entitled  to, 
and  should  have,  earnings  that  are  large  enough  to  render 
their  securities  attractive  to  investors. 

One  of  these  propositions  presents  a  question  of  law 
and  public  policy,  the  other  a  question  of  fact.  We  will 
discuss  them  separately. 

The  justice  in  the  demand  by  the  carriers  that  well 
managed  and  properly  capitalized  railroads  should  have 


130  CREDIT 

an  adequate  credit,  so  that  needed  funds  can  be  secured 
for  additions,  betterments,  and  improvements,  forces  the 
issue  of  railway  credit  into  a  pre-eminent  place.  Next 
to  the  ability  to  maintain  railroad  properties,  the  public 
is  most  deeply  concerned  in  the  ability  of  these  companies 
to  improve  and  better  their  properties. 

Next  to  maintenance  the  greatest  issue  in  the  case  is 
railway  credit.  The  bondholder  and  stockholder  are  con- 
cerned in  this  phase  of  the  case,  as  well  as  the  public. 

RAILWAY  CREDIT. 

First,  let  us  consider  the  evidence  upon  this  subject 
that  has  been  offered  by  the  railroad  companies;  and 
then  we  will  consider  the  evidence  offered  on  behalf  of 
the  public. 

It  will  be  well  to  bear  in  mind  upon  whom  the  burden 
of  proof  rests. 

We  will  present  to  you  the  evidence  not  only  of  the 
market  prices  of  outstanding  securities,  but  also  the  rate 
at  which  these  railway  companies  have  been  able  to  bor- 
row from  their  bankers,  giving  to  you  the  confidential 
prices  that  heretofore  have  rarely,  if  ever,  been  dis- 
closed in  any  hearing  before  any  court  or  commission. 
Accompanying  these,  we  will  present  data  concerning 
representative  industrials  and  public  utilities. 

The  western  railroads  with  an  increasing  dividend, 
could  not  claim  the  necessity  for  wanting  more  money  in 
order  to  pay  their  dividends.  With  an  increasing  mainte- 
nance expenditure,  they  have  abandoned  the  claim  for 
more  money  for  that  purpose.  With  ability,  as  a  whole, 
to  meet  their  operating  expenses,  taxes  and  interest  on 
bonds  and  debt,  those  factors  are  removed;  but  the  argu- 
ment especially  strong  is  that  the  market  prices  of  their 
securities  have  declined,  making  it  impossible  to  secure 
necessary  money  for  much  needed  betterments  and  im- 


CREDIT  131 

provements;  and  that  an  advance  in  freight  rates  will 
restore  the  confidence  the  public  has  in  those  securities. 

DIFFERENCES   IN   EASTERN  AND  WESTERN  CASE. 

A  similar  situation  existed  in  both  the  Eastern  and 
Western  Advanced  Rate  Cases  of  1910.  Heretofore  the 
evidence  on  this  issue,  which  has  been  offered  by  the  rail- 
roads, has  been  very  elaborate.  In  the  Eastern  Advance 
Rate  Case,  there  were  some  eight  or  ten  witnesses,  includ- 
ing four  or  five  bankers,  two  or  three  bond  experts,  and 
several  railroad  executive  officials  of  representative  lines, 
who  testified  extensively  upon  this  subject. 

Let  us  consider  what  the  carriers  have  presented  on  this 
issue  for  your  consideration  in  the  present  proceedings. 
The  amazing  meagerness  and  inconsequential  character 
of  this  evidence  is  one  of  the  remarkable  developments  of 
the  case. 

FESTUS  J.  WADE. 

The  leading  witness  for  the  railroads  on  the  subject  of 
railway  credit,  as  a  whole,  was  Festus  J.  Wade,  a  banker 
of  St.  Louis,  who  announced,  on  taking  the  stand,  in  an- 
swer to  a  question  by  Mr.  Luther  A.  Walter,  as  to  whether 
he  appeared  as  a  banker  or  a  railroad  official:  "I  come 
here  distinctively  as  an  American  citizen."  Later  he 
added  that  he  was  a  director  of  the  Frisco.  It  also  de- 
veloped that  he  had  recently  agreed  to  become  a  director 
of  the  Iron  Mountain  Railway.  The  true  function  of  Mr. 
Wade  in  the  present  controversy  is  best  expressed  in  his 
own  language : 

"Mr.  Walter:  Can  you  give  them  the  assistance 
of  your  experience  by  pointing  out  the  means  by 
which  they  can  determine  whose  credit  is  the  better, 
the  carriers'  or  the  industrials'? 

' '  Mr.  Wade :    I  wouldn  't  attempt  to  do  that. 

"Mr.  Walter:    You  cannot  do  it. 


132  CREDIT 

"Mr.  Wade:  I  might  be  able  to,  but  I  would  not 
attempt  to  do  it. 

"Mr.  Walter:  What  is  the  purpose  of  your  testi- 
mony, then,  Mr.  Wade,  but  to  help  the  Commission? 

1 '  Mr.  Wade :  No  other  purpose  except  to  help  the 
Commission,  to  help  the  railroads  and  to  help  the 
United  States  of  America. 

"Mr.  Walter:    Will  you  include  the  world  in  that? 

"Mr.  Wade:  I  would,  because  we  have  got  to 
finance  the  world,    (tr.  373.) 

"Mr.  Walter:    Yes? 

' '  Mr.  Wade :  And  we  are  doing  everything  for  the 
world  right  now. "    (tr.  374.) 

Mr.  Wade  was  vouched  for  by  Mr.  Wright,  leading 
counsel  for  the  carriers  as  follows:  "I  think  Mr.  Wade 
knows  the  effect  on  credit  as  well  as  any  man  in  this 
country.  * ' 

Mr.  Wade  commenced  his  oration  on  the  stand  with  a 
lot  of  glittering  generalities,  among  which  the  following 
is  typical : 

1 '  You  hear  a  great  deal  about  depression,  about  the 
general  trend  of  affairs  throughout  the  nation.  If 
you  be  a  Democrat  you  will  claim  it  is  on  account  of 
the  war;  and  if  you  are  a  Eepublican,  with  equal 
emphasis  you  will  point  to  the  tariff  and  the  currency 
bill  and  divers  and  other  things,  from  a  political  point 
of  view.  But,  if  you  are  a  student  of  the  economic 
conditions  of  this  nation,  then  you  are  forced  to  the 
conclusion  that  the  constant  tirades  made  upon  the 
railroads  of  this  nation  have  brought  the  investing 
people  of  millions,  to  discredit  them  and  desire  to  put 
their  money  elsewhere."    (tr.  299.) 

Mr.  Wade  was  entirely  unable  to  substantiate  his  gen- 
eralities by  any  statement  of  fact,  and  gave  evidence  of 
considerable  genuine  or  feigned  ignorance  about  the  rail- 
road situation,  generally,  in  the  West.  For  example,  he 
was  unable  to  state  what  were  the  representative  rail- 
roads in  this  territory,  and  he  was  unable  to  give  the  rate, 


CREDIT  133 

time,  or  conditions  of  the  securities  issued  by  any  of  the 
following  companies:  Chicago,  Burlington  &  Quincy; 
Atchison,  Topeka  &  Santa  Fe;  Chicago,  Great  Western; 
Chicago,  Milwaukee  &  St.  Paul;  Chicago  &  North  West- 
ern; Chicago,  St.  Paul,  Minneapolis  &  Omaha;  Illinois 
Central;  Southern  Pacific  Lines;  and  he  did  not  know 
what  proportion  of  the  traffic  was  handled  by  these  com- 
panies. 

Mr.  Wade  admitted  that  he  did  not  know  the  rate  at 
which  representative  public  utilities  were  able  to  borrow 
money,  nor  was  he  advised  as  to  the  rate  at  which  repre- 
sentative industrials  were  able  to  secure  money  during 
the  past  year,  or  during  the  past  five  years. 

Mr.  Wade  could  not  name  one  specific  instance  during 
the  past  year  in  which  any  of  the  representative  com- 
panies in  this  territory  offered  any  5%  long  term  bonds 
that  would  not  be  taken ;  nor  could  he  name  any  time  dur- 
ing the  past  five  years  when  any  of  these  companies'  5% 
bonds  were  refused. 

"Mr.  Thorne:  Take  a  representative  railroad  in 
this  territory,  what  would  you  consider  an  average 
company  amongst  these  thirty-seven  ? 

"Mr.  Wade:  Well,  not  being  a  railroad  expert,  I 
wouldn't  care  to  pass  upon  that.  I  might  make  some 
of  these  other  fellows  jealous. 

1 '  Mr.  Thorne :  You  described  the  companies  I  have 
referred  to  as  the  exceedingly  strong? 

"Mr.  Wade:    The  very  best  in  the  district. 

"Mr.  Thorne:  Do  you  know  what  portion  of  the 
traffic  they  handle  in  the  territory? 

1 '  Mr.  Wade :    No,  I  am  not  a  railroad  man. 

' '  Mr.  Thorne :    You  have  no  idea  ? 

"Mr.  Wade:    I  have  no  idea. 

"Mr.  Thorne:  And  you  do  not  recall  the  rate  at 
which  any  of  those  companies  were  able  to  borrow 
money,  or  don't  you  know  as  to  last  year?" 

The  witness  was  unable  to  do  so.    (tr.  361.) 


134  CREDIT 

1 '  Mr.  Thorne :  You  made  a  statement  this  morning 
that  the  short-term  paper  of  these  railroad  companies 
was  much  higher,  that  the  yield  was  much  higher 
than  the  short-term  paper  of  large  industrials  ? 

1 'Mr.  Wade:    Yes,  sir. 

"Mr.  Thorne:  Did  you  in  making  that  statement 
refer  to  the  short-term  paper  of  a  company  like  the 
Great  Northern? 

1  *  Mr.  Wade :  No,  I  never  had  any  Great  Northern 
paper. 

1  *  Mr.  Thorne :    Or  Northern  Pacific  ? 

"Mr.  Wade:    No. 

"Mr.  Thorne:    Burlington? 

"Mr.  Wade:    No. 

1 '  Mr.  Thorne :    Illinois  Central  ? 

"Mr.  Wade:    No. 

1 '  Mr.  Thorne :    Union  Pacific  ? 

"Mr.  Wade:    No.,,    (tr.  342.) 

"Mr.  Thorne:  The  witness  has  testified  that  it  is 
difficult  for  these  companies  to  borrow  money.  I  de- 
sire to  ask,  can  you  name  any  specific  instance  during 
the  past  year  in  which  any  of  the  companies  which  I 
named  offered  any  5%  long-term  bonds  that  would 
not  be  taken? 

"Mr.  Wade:    No,  I  cannot. 

1  ■  Mr.  Thorne :  Can  you  name  any  time  during  the 
past  five  years  in  which  any  of  the  companies  I  named 
offered  5%  bonds  that  were  not  taken? 

1 '  Mr.  Wade :  No,  I  do  not  know  whether  they  did 
or  not,  that  is  a  matter  of  record  which  I  would 
not  attempt  to  go  into,  as  I  explained  to  you  before.' ' 
(tr.  397-8.) 

"Mr.  Thorne:  Mr.  Witness,  do  you  know  of  any 
issue  of  bonds  that  have  been  made  by  any  of  these 
companies  that  I  have  stated  to  you,  during  the  past 
few  years, — five  years? 

"Mr.  Wade:  Yes,  in  a  general  way  I  know  that 
the  St.  Paul  issued  bonds,  and  the  North  Western, 
and  I  believe  the  Great  Northern  and  Pacific  roads. 

"Mr.  Thorne:  Now  take  one  of  them.  Take  the 
Milwaukee. 


CREDIT  135 

1 '  Mr.  Wade :  I  say,  I  only  know  in  a  general  way. 
I  did  not  handle  them. 

"Mr.  Thorne :    And  you  do  not  know  at  what  rate ? 

' '  Mr.  Wade :    No,  and — 

"Mr.  Thorne:  Do  you  know  at  what  rate  any  of 
those  companies  were  able  to  dispose  of  long-term 
bonds  at  any  time  during  the  past  five  years  ? 

"Mr.  Wade:    Right  offhand,  no."    (tr.  348-9.) 

Practically  the  only  subject  upon  which  Mr.  Wade  had 
the  courage  to  make  a  definite  concrete  statement  was  in 
regard  to  the  decline  in  prices  on  railway  securities,  to 
the  effect  that  railroads  had  to  pay  from  50%  to  75%  more 
for  their  money,  than  public  utilities  and  industrials;  and, 
second,  Mr.  Wade  testified  that  while  there  had  been  a 
marked  decline  in  the  market  prices  of  railroad  bonds 
during  the  past  ten  or  fifteen  years,  there  had  been  prac- 
tically no  decline  since  1900  in  the  market  prices  of  the 
bonds  of  St.  Louis,  Philadelphia,  or  any  other  of  the  20 
largest  cities  in  the  United  States,  with  the  possible  ex- 
ception of  New  York.  Mr.  Wade  in  his  direct  testimony 
especially  urged  the  decline  in  market  prices  on  railroad 
securities  as  evidence  of  a  declining  credit. 

Later  Mr.  Norton  presented  in  evidence  the  actual  yield 
computed  from  actual  market  prices  reported  in  the  Fi- 
nancial Chronicle  for  St.  Louis  bonds,  and  these  official 
reports  show  that  the  market  prices  on  St.  Louis  bonds, 
instead  of  remaining  constant  since  1900,  as  Mr.  Wade 
under  oath  testified,  the  said  prices  had  actually  declined 
25%.  This  decline  in  prices  caused  an  increase  in  the 
yield  amounting  to  25%,  as  shown  in  Norton's  Exhibit  3, 
tr.  63. 

Further,  Mr.  Wade  stated  as  to  the  20  largest  cities, 
as  given  above,  if  you  take  New  York  our  of  the  category, 
you  will  find  municipal  bonds  have  been  about  steady 
and  that  the  variation  in  them  has  not  been  one-tenth, 
one-fifteenth  in  price  in  10  years  as  against  the  railroad 


136  CREDIT 

bonds.  As  a  matter  of  fact,  Mr.  Norton,  who  presented 
the  detailed  data  as  well  as  his  summary,  conclusively 
proved  that  the  market  prices  had  declined,  or  the  yields 
had  increased  by  31%,  while  on  the  representative  North- 
western lines  of  railroads,  during  the  same  period  of 
time,  the  decline  in  price,  as  evidenced  by  the  increase 
in  yields,  only  amounted  to  15.4%,  and  for  the  South- 
western railroads  the  increase  was  still  less,  being  6.3%. 
The  authority  used  by  Mr.  Norton  for  these  quotations 
was  the  Financial  Chronicle. 

On  cross-examination  Mr.  Wade  conceded  that  the 
Financial  Chronicle  was  absolutely  reliable  and  that  any 
statements  made  by  it  could  be  depended  upon  as  being 
correct;  that  there  was  not  a  better  authority  in  the 
United  States  (tr.  335). 

Further  Mr.  Wade  testified  that  these  railroads  had 
to  pay  more  for  the  use  of  their  money  than  manufac- 
turing and  industrial  concerns  for  the  same  kind  of  credit. 

Later  Mr.  Norton  proved  conclusively,  and  incontes- 
tably,  that  the  market  prices  of  outstanding  issues  as  well 
as  of  new  issues  of  these  western  railroads'  securities 
were  higher  than  any  other  class  of  companies  in  any 
other  line  of  business  in  the  United  States,  the  details  of 
which  showing  will  be  presented  later. 

MR.  SCHAFF. 

Mr.  Schaff  and  the  other  railroad  officials  who  took  the 
stand  could  remember  very  little  about  any  other  com- 
panies than  the  Missouri,  Kansas  &  Texas  and  the  Mis- 
souri Pacific,  with  relation  to  any  issues  of  securities.  As 
to  practically  all  other  companies,  their  memory  seemed 
to  be  a  blank.  Not  one  witness  for  the  carriers  could  recall 
one  other  company  than  these  two,  whose  issues  did  not 
sell  at  a  better  rate  than  any  other  company  they  could 
name,  in  any  other  line  of  business.  The  witnesses  for  the 
carriers  plead  almost  entire  ignorance  as  to  the  prevailing 


CREDIT  137 

rates  of  interest  throughout  the  country,  or  the  ability  of 
companies  in  any  other  lines  of  business  in  the  United 
States  to  borrow  money  or  the  rate  they  had  to  pay. 

Mr.  Wade  was  the  one,  only,  striking  exception  to  this 
proposition,  and  his  astounding  misstatements  on  the 
situation  will  be  fully  presented  when  we  are  discussing 
the  shippers '  testimony. 

Mr.  Schaff  recalled  an  issue  of  the  Southern  Pacific,  but 
it  will  be  noted  that  this  company  is  not  a  party  respond- 
ent to  these  proceedings.  He  also  recalled  an  issue  on  the 
North  Western  which  sold,  he  thought,  at  something  like 
5%,  but  recalled  no  other  company  in  any  other  line  of 
business  that  was  able  to  borrow  money  at  a  better  rate 
at  that  time. 

Mr.  Felton  recalled  an  issue  of  the  Burlington.  He  like- 
wise could  not  name  any  company  in  any  other  line  of 
business  that  could  borrow  at  a  better  rate.  Mr.  Schaff 
admitted  further  that  he  had  at  no  time  made  any  investi- 
gation of  railway  credit  of  companies  in  the  district  as  a 
whole. 

Because  of  the  very  great  importance  to  be  attached  to 
this  subject  of  railway  credit,  and  because  of  the  some- 
what remarkable  comments  that  can  be  made  in  regard 
to  the  carriers '  evidence  upon  this  issue,  we  shall  produce 
in  full  the  exact  language  adopted  by  the  witnesses  when 
on  the  stand,  so  that  the  Commission  itself  can  readily  de- 
termine the  substantial  correctness  of  our  statements. 

' '  Mr.  Thome :  Do  you  know  the  last  note  or  bond 
issued  by  any  company  in  this  case,  the  last  that  you 
can  remember,  what  was  it  ? 

"Mr.  Schaff:  I  think  the  Missouri  Pacific  issued 
or  extended  some  notes  within  a  year. 

"Mr.  Thorne:  Your  memory  does  not  go  to  any 
issue  made  by  the  North  Western,  does  it? 

' '  Mr.  Schaff :  I  think  the  North  Western  sold  some 
first  mortgage  bonds  within  a  reasonably  short  time, 
I  could  not  name  the  date. 


138  CREDIT 

"Mr.  Tkorne:    About  what  year  was  that? 
"Mr.  Schaff:    I  think  within  a  year  past. 
1 '  Mr.  Thorne :    Do  you  know  what  part  of  the  year, 
during  the  war  or  before  I 

"Mr.  Schaff:    I  do  not  think  I  could  definitely  say. 

"Mr.  Thorne:  Do  you  know  at  what  rate  they 
were  issued? 

"Mr.  Schaff:    I  think  at  about  5%. 

"Mr.  Thorne:  Can  you  name  any  other  company 
in  any  other  line  of  business  that  was  able  to  borrow 
money  cheaper  than  that  at  that  time? 

"Mr.  Schaff:    Cheaper  than  5%! 

1 '  Mr.  Thorne :    Yes,  at  that  time. 

"Mr.  Schaff:    No,  sir. 

1 '  Mr.  Thorne :  Do  you  remember  any  issues  by  the 
Burlington,  notes  or  mortgages,  within  the  last  few 
years  ? 

"Mr.  Schaff:    No,  sir. 

"Mr.  Thorne:    Of  the  Northern  Pacific ? 
"Mr.  Schaff:    No,  sir. 

"Mr.  Thorne:    Of  the  Great  Northern? 

"Mr.  Schaff:    No. 

"Mr.  Thorne:    The  Union  Pacific? 

"Mr.  Schaff:    No. 

' '  Mr.  Wright :    They  are  not  in  this  case. 

"Mr.  Thorne:  The  Union  Pacific  passes  through 
Nebraska,  does  it  not?  It  taps  the  territory  upon 
which  you  are  proposing  advances,  the  mileage 
hauled  through  it,  and  Kansas  also.  Do  you  recall 
any  issues  by  the  Santa  Fe  in  the  last  year  or  so  ? 

"Mr.  Schaff:    No,  sir. 

"Mr.  Thorne:  Do  you  recall  any  issues  by  the 
Southern  Pacific? 

"Mr.  Schaff:  Yes,  I  recall  an  issue  of  bonds  of 
the  Southern  Pacific. 

"Mr.  Thorne:    When? 

"Mr.  Schaff:    Some  time  during  the  last  year. 

"Mr.  Thorne:    How  much? 

"Mr.  Schaff:    My  recollection  is  about  $75,000,000. 


CREDIT  139 

"Mr.  Thorne:    What  part  of  the  year? 

1 '  Mr.  Schaff :    I  do  not  know. 

' '  Mr.  Thorne :    At  what  rate ! 

"Mr.  Schaff:    I  think  at  about  6%. 

"Mr.  Thorne:  Do  you  remember  whether  it  was 
before  or  after  the  war  commenced! 

"Mr.  Schaff:    I  do  not  recall  it.     No,  sir. 

"Mr.  Thorne:  Would  it  be  difficult  for  you  to 
verify  that  at  noon  hour!  I  am  informed  that  that 
was  at  the  rate  of  h%. 

' '  Mr.  Schaff:  I  do  not  think  I  could.  ■ »  (tr.  90-1-2-3.) 

' '  Mr.  Thorne :  I  asked  you  the  rate  at  which  other 
companies  had  been  able  to  market  their  securities 
and  you  were  able  to  name  them  on  only  two  of  those 
companies  and  those  were  two  of  the  weaker  lines  in 
that  territory,  were  they  not  ? 

"Mr.  Schaff:    I  named  two  in  the  southwest. 

"Mr.  Thorne:  You  don't  claim  to  know  anything 
about  the  credit  of  these  roads,  do  you ! 

"Mr.  Schaff:    No. 

1 '  Mr.  Thorne :  So  your  statement  that  their  credit 
is  poor  only  applies  to  those  two  railroads  ? 

1 ' Mr.  Schaff:    I  know  what  the  general  situation  is. 

"Mr.  Thorne:  You  haven't  made  any  investigation 
of  the  rate  at  which  these  other  railroads  in  this 
territory  have  been  able  to  borrow  money  in  the  past 
few  years,  have  you! 

"Mr.  Schaff:    Some  of  them. 

"Mr.  Thorne:  Name  any  besides  those  two  that 
you  named  this  morning. 

"Mr.  Schaff:  I  can  only  give  my  impression  as  to 
that,  my  opinion. 

"Mr.  Thorne:  Have  you  made  any  investigation? 
There  is  no  impression  about  that. 

"Mr.  Schaff:  No,  no  definite  investigation,  no, 
sir."     (tr.  144-5.) 


140  CREDIT 

MR.  FELTON. 

Mr.  Felton,  President  of  the  Great  Western,  made  simi- 
lar admissions.  He  conceded,  for  example,  that  he  could 
not  name  any  company  that  could  borrow  money  at  a 
cheaper  rate  than  his  own  railroad  company. 

1 '  Mr.  Thome :  *  *  Can  you  borrow  money  as  cheap 
now  as  you  could  before  the  war  commenced? 

"Mr.  Felton:  You  can  borrow  money  as  cheap 
today  for  short  terms,  I  should  say,  as  you  could  be- 
fore the  war  commenced,  but  since  the  war  we  have 
paid  as  high,  as  I  told  you,  as  7^%  for  one  year 
money. 

"Mr.  Thome:    What  month  was  that? 

' '  Mr.  Felton :    That  was  November. 

1 '  Mr.  Thorne :  Can  you  name  any  other  company 
in  any  other  line  of  business  in  that  month  that  was 
able  to  borrow  at  a  cheaper  rate  than  you? 

"Mr.  Felton:  No,  I  think  not.  I  think  higher 
rates  than  that  were  paid. 

"Mr.  Thorne:  Have  you  investigated  the  rates  at 
which  companies  in  other  lines  of  business,  I  mean 
these  other  railroads,  have  been  able  to  borrow 
money  during  the  past  year  ? 

1 '  Mr.  Felton :  Some  of  the  southwestern  roads,  the 
Missouri  Pacific,  I  believe,  had  to  extend  their  notes, 
and — 

"Mr.  Thorne:  We  have  had  testimony  about  the 
Missouri  Pacific  and  the  M.,  K.  &  T. ;  they  seem  to  be 
quite  favorite  companies  for  you  gentlemen  to  men- 
tion. Can  you  name  any  securities  issued  by  the 
Burlington  or  the  North  Western  during  the  last  year 
or  the  last  three  or  four  years  ? 

"Mr.  Felton:  I  do  not  know  about  the  Burling- 
ton, but  the  North  Western  sold  some  bonds  recent- 
ly, some  5%  bonds. 

1 '  Mr.  Thorne :    When  were  they  sold,  about  when  ? 

"Mr.  Felton:    Last  fall,  I  think. 

"Mr.  Thorne:  Do  you  remember  about  what 
month  it  was? 


CREDIT  141 

"Mr.  Felton:  No,  I  do  not,  but  I  could  easily  find 
out  by  referring  to  the  Financial  Chronicle. 

"Mr.  Thorne :  Do  you  know  at  what  rate  they  sold? 

"Mr.  Felton:    My  recollection  is  about  5%. 

"Mr.  Thorne:  Can  you  name  any  other  company 
in  any  other  line  of  business  that  could  sell  their  se- 
curities at  a  better  rate  at  that  time? 

1 '  Mr.  Felton :  No,  I  think  they  were  in  a  very  fav- 
orable position. 

"Mr.  Thorne:  Can  you  name  any  securities  sold 
in  the  last  year  or  the  last  three  years  or  four  years 
by  the  Union  Pacific  or  the  Atchison,  Topeka  & 
Santa  Fe? 

1 '  Mr.  Felton :  I  have  not  kept  track  of  the  Santa 
Fe  and  the  Union  Pacific  at  all. 

"Mr.  Thorne:  You  would  not  be  able  to  say 
whether  their  credit  was  good  or  poor? 

"Mr.  Felton:  Oh,  yes,  I  would.  I  should  say  the 
credit  of  all  three  of  these  companies  was  the  high- 
est and  that  is  the  reason  they  can  sell  their  bonds  at 
a  comparatively  low  rate  of  interest. 

' '  Mr.  Thorne :  I  am  asking  you,  then,  are  there  not 
hundreds  of  industrial  companies  in  this  country  that 
borrow  money,  of  which  we  have  official  records  in 
the  reports  of  the  exchanges  ? 

"Mr.  Felton:  Well,  I  do  not  follow  their  finances, 
so  I  could  not  answer  you  definitely. 

"Mr.  Thorne:  There  are  also  hundreds,  some- 
thing like  three  thousand  utilities  listed  by  Moody, 
are  there  not? 

1 '  Mr.  Felton :  I  do  not  know,  I  am  sure. ' '  (tr.  188- 
9,190-1.) 

"Mr.  Thorne:  "You  cannot  state  then  whether 
you  have  made  any  comparison  of  the  issues  of  any 
of  these  companies  during  the  past  month? 

"Mr.  Felton:     I  had  no  reason  to. 

1 '  Mr.  Thorne :  Have  you  made  an  analysis  of  the 
rate  at  which  these  different  companies,  the  different 
industrials  and  the  different  public  utility  companies, 
have  been  able  to  market  their  securities  at  the  same 
time  at  which  these  western  railroads  have  attempted 


142  CREDIT 

to  market  their  securities?  If  you  have  not  made 
such  an  investigation,  we  will  pass  on  to  another 
question.  If  you  have,  I  would  like  to  have  the  re- 
sults of  that  investigation. 

"Mr.  Felton:  I  have  not  made  any  such  investi- 
gation. I  have  confined  it  to  our  own  field."  (tr. 
193-194.) 

J.  W.  LUSK. 

J.  W.  Lusk,  one  of  the  receivers  of  the  Frisco  Line, 
made  some  sweeping  statements  about  the  poor  condition 
of  railroads.  He  dwelt  with  special  emphasis  upon  the 
condition  of  the  Frisco.  In  speaking  of  what  he  de- 
scribed as  the  property  of  the  Frisco  and  its  failure  to 
earn,  he  admitted  that  other  lines  of  business  well  located 
and  having  valuable  facilities  were  unable  to  earn  a  re- 
turn on  the  value  of  their  property. 

Mr.  Lusk's  statement  that  the  railroads  "were  in  the 
soup"  proved  to  be  founded  merely  upon  a  general  im- 
pression and  was  not  based  upon  any  investigation  of  his 
own.  He  admitted  finally  that  his  knowledge  was  re- 
stricted to  the  Frisco,  and  he  did  not  know  anything  about 
that  prior  to  December  5,  1913 ;  that  he  had  never  inves- 
tigated the  financial  condition  of  the  railroads  as  a  whole 
in  this  territory,  that  he  did  not  know  that  their  net  earn- 
ings in  1913  were  greater  than  ever  before  in  their  his- 
tory, and  he  was  unable  to  name  what  were  the  average, 
or  representative,  roads  in  this  section. 

"Mr.  Thorne:  I  presume  in  your  experience  in 
St.  Paul  as  a  banker  that  you  have  known  people  in 
other  lines  of  business  than  the  railroad  business, 
that  had  fine  property,  well  located,  worth  money, 
who  are  unable  to  earn  a  return  on  the  value  of  the 
property? 

"Mr.  Lusk:    Yes. 

"Mr.  Thorne:  When  did  you  become  connected 
with  the  Frisco? 

"Mr.  Lusk:    December  5, 1913. 

"Mr.  Thorne:  Were  you  connected  with  the  com- 
pany or  the  property  in  any  capacity  prior  to  that 
date,  Mr.  Lusk? 


CREDIT  143 

"Mr.  Lusk:    Not  at  all. 

"Mr.  Thorne:  You  have  no  personal  knowledge 
of  the  management  or  the  operation  of  the  property 
during  those  former  years  ? 

"Mr.  Lusk:    No,  sir. 

"Mr.  Thorne:  You  do  not  know  whether  that 
property  was  well  operated  or  whether  it  was  main- 
tained properly,  do  you? 

"Mr.  Lusk:  No,  except  just  when  the  receivers 
took  possession  it  had  been  somewhat  run  down,  as 
is  always  the  case  previous  to  any  receivership. 

"Mr.  Thorne :  I  understand  you  have  no  personal 
knowledge  of  the  financial  operations  of  the  people 
in  charge  of  it  prior  to  that  time  ? 

"Mr.  Lusk:    No."    (tr.  589-590.) 

"Mr.  Lusk:  Every  one  knows  that,  no  matter  how 
you  say  it  comes  about,  it  is  simply  a  fact,  that  rail- 
roads, to  use  a  little  slang,  are  '  in  the  soup, '  no  mat- 
ter how  you  say  it  came  about.  I  will  not  say  any- 
thing about  that,  but  they  are  down.  You  can  lay  it 
to  low  rates  or  European  war  or  Mexican  war  or 
floods  or  depression  or  economy,  but  the  railroads 
are  down  under  the  water. 

4 '  Mr.  Thorne :  Judge,  do  you  make  that  statement 
from  a  personal  analysis  of  the  financial  operations 
of  these  railroads  as  a  whole,  or  do  you  make  that 
statement  from  a  general  impression  that  you  have 
of  the  situation  f 

"Mr.  Lusk:  Well,  I,  of  course,  have  conversed  a 
great  deal  as  to  how  they  are  getting  along  in  the 
southwest,  and  also  with  Mr.  Hill  in  the  northwest, 
and  Mr.  Hannaford  of  the  Northern  Pacific,  and  Mr. 
Clark  of  the  Omaha.  I  know  these  men  personally, 
and  when  I  am  at  home  we  are  at  the  same  club,  and 
I  talk  with  them  about  it.  Of  course  there  is  a  big 
falling  off  in  all  of  their  earnings.  Mr.  Hill  said  he 
had  never  had  as  bad  a  falling  off  as  he  had  all  last 
fall,  and  yet  the  country  is  full  of  good  crops  and  high 
prices.  It  is  a  remarkable  state  of  affairs.  How 
much  it  can  be  laid  to  low  rates — of  course  anybody 
can  figure  out  that  a  two-cent  fare  in  the  west  here 


144  CREDIT 

is  entirely  too  low.  There  is  not  any  mistake  about 
that. 

"Mr.  Thorne:  You  would  differ  from  the  Minne- 
sota Commission  and  the  Supreme  Court  of  the 
United  States  on  that,  I  presume  ? 

"Mr.  Lusk:  The  Minnesota  Commission  and  the 
United  States  Supreme  Court  did  not  hold  that  two 
cents  was  high  enough.  They  said  they  had  not 
proved  it  was  too  low ;  they  did  not  really  pass  on  it. 

"Mr.  Thorne:  They  said  the  railroads  failed  to 
prove  their  case. 

"Mr.  Lusk:  It  was  too  low  for  the  Minneapolis 
&  St.  Louis  and  the  Great  Western,  but  the  Northern 
Pacific  and  the  Great  Northern  from  their  proof  did 
not  show  that  they  were  earning  enough. 

Mr.  Thorne :  Have  you  made  any  other  investiga- 
tion of  the  situation  except  in  conversing  with  the 
railroad  men?  Have  you  investigated  to  see  what 
the  earnings  were,  for  instance,  the  last  few  years  on 
these  railroads  ? 

"Mr.  Lusk:    Oh,  no. 

1 '  Mr.  Thorne :  You  do  not  know  then,  as  a  matter 
of  fact,  that  their  net  earnings  in  1913  in  this  western 
territory  were  greater  than  ever  before  in  their  his- 
tory? 

"Mr.  Lusk :    No,  I  do  not  know  about  that. 

"Mr.  Thorne :  You  have  never  made  an  investiga- 
tion of  what  you  might  say  would  be  average  roads  or 
representative  roads  as  distinguished  from  weaker 
roads  and  the  extremely  strong  roads  in  that  terri- 
tory? 

"Mr.  Lusk:  No,  my  attention  has  been  confined 
right  here  to  the  Frisco  and  I  have  told  just  what  we 
are  doing  and  that  is  all  I  can  do.     (tr.  592-3-4.) 

WETTLING  ON  CREDIT. 

We  asked  each  witness  who  took  the  stand  on  behalf 
of  the  carriers,  as  to  any  information  concerning  the 
credit  of  western  railroads.  Mr.  Wettling  was  the  only 
gentleman  to  produce  any  definite  information  concern- 


CREDIT  145 

ing  their  ability  to  borrow  money.  He  had  compiled  this 
data  from  answer  to  interrogatories  which  he  had  ad- 
dressed to  the  different  companies.  He  was  asked  to 
state  the  issues  during  the  past  five  years  for  the  North- 
western group  of  railroads.  Because  of  its  definite  char- 
acter, in  direct  confirmation  of  the  results  as  shown  in 
Mr.  Norton's  exhibits,  we  call  your  attention  to  the 
details  as  shown  in  the  testimony  of  Mr.  Wettling. 

Attention  is  called  to  Mr.  Wettling 's  utter  ignorance 
of  any  financial  needs  of  the  carriers;  and  yet  he  was 
the  chief  witness,  and  the  only  witness,  for  nine-tenths 
of  the  railroads  in  the  territory. 

BURLINGTON. 

*  '  Mr.  Thorne :  You  don 't  know  anything  about  the 
financial  condition  of  the  Burlington,  its  financial 
needs,  whether  it  has  to  borrow  money,  has  any  im- 
mediate demand  for  money,  and  if  so,  whether  it  has 
any  difficulty  in  getting  that  money? 

"Mr.  Wettling:  Answering  a  part  of  that  ques- 
tion, I  know  that  the  Burlington  is  considered  as 
one  of  the  roads  that  has  the  very  highest  credit  and 
can  borrow  money  cheaper  than  the  average ;  but  as 
to  what  their  immediate  needs  are,  whether  they  need 
to  borrow  money,  I  don't  know.  I  should  think 
they  would  need  to  borrow  money  if  they  wanted  to 
make  extensions  and  betterments  to  any  appreciable 
amount. 

1 '  Mr.  Thorne :  Do  you  know  whether  they  are  hav- 
ing any  difficulty  in  getting  the  money? 

"Mr.  Wettling:    I  do  not. 

"Mr.  Thorne:  You  don't  know  whether  they  are 
having  any  difficulty  in  getting  money  at  reasonable 
rates,  do  you? 

"Mr.  Wettling:  It  would  appear  from  the  bonds 
they  sold  in  1914,  that  they  are  not  having  much 
difficulty  in  getting  it  at  reasonable  rates,  although 
they  are  paying  considerably  more  than  they  did 
in  former  years  for  the  same  security,    (tr.  4053-55.) 


146  CREDIT 


"Mr.  Thome :  As  I  understand,  you  do  not  claim 
to  have  any  knowledge  or  to  have  made  any  investi- 
gation concerning  the  credit  of  railroads  as  com- 
pared to  companies  in  other  lines  of  business  ? 


"Mr.  Wettling:  Yes,  I  have  made  some  little 
investigation  in  a  general  way  and  made  some  com- 
parisons generally  as  to  railroads,  municipals,  in- 
dustrials and  public  service  corporation  bonds. 

"Mr.  Thorne:  Can  you  name  any  company  that 
was  able  to  borrow  money  at  a  better  rate  than  the 
Burlington  last  year,  which  you  made  reference  to  f 

"Mr.  Wettling:    No.    (tr.  4060.) 

NORTH  WESTERN. 

"Mr.  Wettling:  The  North  Western  borrowed 
some  money  on  their  general  mortgage  gold  bonds 
due  in  1987,  having  73  years  yet  to  run,  and  bearing 
interest  at  4%,  on  a  basis  of  4.4%.  They  sold  them 
at  92.    (tr.  4064.) 

"Mr.  Thorne:  So  that  the  same  comments  you 
made  about  not  knowing  of  any  companies  in  any 
other  line  of  business  that  could  borrow  at  a  better 
rate  last  year,  would  apply  to  the  North  Western? 

"Mr.  Wettling:  Yes,  sir.  They  also  borrowed 
$4,000,000  on  equipment  trust  notes  for  which  they 
received  $3,821,856.80,  being  sold  at  the  rate  of  95.54 
and  yielding  5y8%.     (tr.  4065.) 

"Mr.  Thorne :  Can  you  name  any  company  in  any 
other  line  of  business  that  was  able  to  borrow  money 
under  similar  conditions  for  a  similar  period  at  a 
better  rate! 

' '  Mr.  Wettling :  I  have  none  in  mind  now.  I  think 
that  some  public  service  corporations  were  able  to 
borrow  money  at  a  better  rate  than  that  last  year. 

' '  Mr.  Thorne :    Name  one. 

1 '  Mr.  Wettling :  I  say  I  have  not  them  in  my  mind 
now,  but  I  think  I  can  investigate  and  bring  them  to 
you. 


CREDIT  147 

"Mr.  Thome :  Can  you  name  any  company  in  any 
other  line  of  business  that  was  able  to  borrow  money 
for  long  periods  of  time  during  the  past  five  years 
at  a  better  rate  than  what  the  North  Western  has 
been  able  to  do  at  the  same  time  1 

"Mr.  Wettling:    I  do  not  think  so. 

MILWAUKEE. 


ti- 


Mr.  Thome:  In  regard  to  the  Milwaukee,  at 
what  rate  did  they  borrow  money  last  year  ? 

"Mr.  Wettling :  4.4  and  4%,  for  the  larger  part  of 
their  borrowings,    (tr.  4066.) 

"Mr.  Thome:  Will  you  give  the  same  answer  as 
to  the  Milwaukee  that  you  gave  as  to  the  North 
Western  and  Burlington? 

"Mr.  Wettling:  Generally  so,  yes;  their  credit  is 
about  on  a  par  with  the  others. 

UNION  PACIFIC. 

"Mr.  Thome:  A  fourth  road  you  named  was  the 
Union  Pacific  out  of  the  six  that  you  said  were  repre- 
sentative of  this  territory. 

"Mr.  Wettling:    Yes,  sir. 

Mr.  Thorne :  Can  you  give  any  companies  in  any 
other  line  of  business  than  the  railroad  industry  that 
are  able  to  borrow  money  at  a  better  rate  than  the 
Union  Pacific  last  year,  or  during  the  past  five  years, 
at  the  same  time  ? 

"Mr.  Wettling:  I  have  not  made  investigation 
and  do  not  know  what  the  Union  Pacific  is  borrow- 
ing at. 

NORTHERN  PACIFIC. 

"Mr.  Thorne:  The  same  situation  applies  to  the 
Northern  Pacific? 

"Mr.  Wettling:    Yes,  sir. 


148  CREDIT 

GREAT  NORTHERN. 

"Mr.  Thome:    The  Great  Northern? 
"Mr.  Wettling:    Yes,  sir. 

GREAT  WESTERN. 

"Mr.  Thome:  At  what  rate  did  the  Great 
Western  borrow  money  during  the  past  year? 

1 '  Mr.  Wettling :  They  did  not  borrow  any  money ; 
they  just  exchanged  some  securities,  as  I  understand 
it.  It  would  appear  on  a  basis  of  practically  4%, 
if  it  were  taken  as  a  borrowing. 

1 '  Mr.  Thorne :  Can  you  name  any  other  companies 
in  any  other  line  of  business  than  the  railroad  indus- 
try that  are  able  to  borrow  money  at  a  better  rate 
than  the  Great  Western  in  the  past  year  or  past 
five  years? 

"Mr.  Wettling:  I  do  not  think  they  really  bor- 
rowed. I  think  that  was  just  an  exchange  of 
securities. 

"Mr.  Thorne.  They  have  borrowed  money  at 
times  ? 

1 '  Mr.  Wettling :    Not  the  last  year. 

"Mr.  Thorne:    In  the  past  five  years? 

"Mr.  Wettling:    In  the  past  year. 

1 1  Mr.  Thorne :    Read  the  question,  Mr.  Reporter. 

"Mr.  Wettling:  Never  mind,  if  it  is  five  years. 
That  is  all  I  want  to  know.  In  1911  the  Chicago 
Great  Western  sold  $4,000,000  of  their  4%  fifty  year 
First  Mortgage  Gold  Bonds  on  a  basis  of  85.75,  being 
a  yield  of  4%%.  That  is  apparently  all  the  sales  in 
the  past  five  years. 

"Mr.  Thorne:  Then  I  repeat  the  question.  You 
may  read  the  question,  Mr.  Reporter. 

(Question  read.) 

"Mr.  Wettling :  I  am  not  able  to  name  one ,-  but 
I  think  I  can  produce  some,  and  will  if  you  desire. 
I  have  not  the  tabulations  or  figures  before  me  for 
any  other  industries,  municipal  corporations,  public 


CREDIT  149 

service  corporations  or  such,  and  I  am  therefore  not 
able  offhand  to  give  any  answers  to  the  questions 
you  are  propounding,    (tr.  4067-8-9.) 

SOUTHWESTERN  GROUP  TERRITORY. 

1 '  Mr.  Thorne :  You  have  made  no  analysis  of  the 
financial  history  of  those  lines  serving  the  territory 
south  of  that  line  or  their  present  financial  needs? 

"Mr.  Wettling:    No,  sir."    (tr.4080.) 

While  Mr.  Wettling  was  on  the  stand,  he  also  discussed 
information  as  to  what  the  Kock  Island  Railway  Com- 
pany has  been  able  to  obtain  its  money  for  during  the 
past  five  years.  Notwithstanding  the  condition  ofl  a 
certain  holding  company,  we  find  the  Rock  Island  has  pre- 
served a  good  credit  as  evidenced  by  the  following  ex- 
tracts from  Mr.  Wettling 's  testimony : 

CHICAGO,  ROCK  ISLAND  &  PACIFIC. 

"Mr.  Wettling:  The  Rock  Island  borrowed 
$13,980,000  on  their  first  refunding  mortgage  bonds, 
running  thirty  years,  sold  at  89.82,  the  yield  being 
4.6%. 

"In  1910  the  Rock  Island  borrowed  on  the  same 
series  of  bonds  $6,195,000  for  which  they  received 
87.40,  making  a  yield  of  4.8%. 

"They  borrowed  $11,000,000  in  the  same  year  at 
90.46,  being  a  yield  of  4.6%. 

"They  borrowed  $5,300,000  on  equipment  trust 
notes  for  ten  years,  carrying  4*4%  for  99.25,  being 
a  yield  of  4.6%. 

"They  borrowed  $6,750,000  on  equipment  trust 
notes,  series  D,  running  15  years  at  4y2%,  on  a  basis 
of  95.50,  which  was  a  yield  of  4.9%. 

"In  1911,  on  the  C,  R.  I.  &  P.  first  refunding  30 
year  mortgage  bearing  4%,  they  borrowed  $5,324,000 
at  a  rate  of  86.14,  which  was  4.9%. 

"In  the  year  1912  they  borrowed  on   the   first 


160  CREDIT 

refunding  30  year  mortgage  $3,500,000  on  a-  basis 
of  87y2,  making  a  yield  of  4.8%. 

"They  borrowed  on  their  20  year  gold  debenture 
bonds,  carrying  5%,  $20,000,000,  on  which  they  suf- 
fered a  discount  of  $1,200,000,  selling  them  at  the 
rate  of  98  cents,  being  a  yield  of  5%%. 

"They  sold  equipment  notes,  series  F,  running  15 
years,  and  carrying  4^%,  to  the  amount  of  $360,000 
on  a  basis  of  95.79,  which  was  at  the  rate  of  4.9%. 

"In  1913  they  borrowed  on  equipment  notes,  series 
G,  15  years,  4^?%,  $4,590,000,  on  a  basis  of  96.05, 
which  was  at  the  rate  of  4%%. "    (tr.  4077-78.) 

No  one  took  the  stand,  on  behalf  of  the  carriers  during 
the  entire  proceeding,  who  claimed  to  have  any  knowl- 
edge about  the  financial  needs  of  any  of  the  Northwestern 
group  of  railroads  except  the  Great  Western,  or  who  un- 
dertook to  make  the  claim  that  any  of  those  railroads  had 
any  trouble  whatever  in  securing  all  the  money  they 
needed,  at  reasonable  rates. 

AS  TO  THE  MARGIN  BETWEEN  STOCK  RATE  AND  BOND  RATE. 

As  to  the  margin  between  stock  rates  and  bond  rates, 
undoubtedly  from  the  standpoint  of  the  railroads  it  would 
be  nice  to  build  their  lines  with  4%  money  and  secure  a 
return  on  the  value  of  their  property  at  the  rate  of  6%. 
That  handsome  margin  would  be  quite  acceptable  un- 
doubtedly, for  where  a  railroad  was  bonded  to  two-thirds 
of  its  value,  the  stockholders  would  have  over  ten  per 
cent  return. 

That  handsome  margin  would  be  quite  acceptable  un- 
doubtedly, but  that  margin  is  not  necessary  in  order  to 
maintain  credit.  Over  ninety  per  cent  of  the  public 
utility  companies  classified  in  our  exhibits  in  this  case 
have  no  such  margin  between  their  bond  rate  and  their 
stock  rate.  In  England  there  is  very  little  margin  be- 
tween the  stock  rate  and  the  bond  rate.  The  average 
dividend  in  1912  (the  latest  available  statistics)  on  ordi- 


CREDIT  151 

nary  stock  in  England  was  3.71,  while  the  average  rate  of 
interest  on  bonds  was  3.39,  a  variation  of  less  than  half  of 
one  per  cent.  In  the  United  Kingdom  as  a  whole  the  aver- 
age dividend,  including  Scotland,  Ireland  and  Wales,  was 
3.45  and  the  average  interest  rate  on  bonds  was  3.43. 
(Official  Reports  to  Parliament.  Ellis  Exhibit  No.  2, 
pages  22,  24.) 

SHIPPERS'  EVIDENCE  ON  CREDIT. 

In  previous  cases  before  this  Commission,  we  have 
made  claims  and  statements  as  to  railway  credit  that 
have  been  supported  by  computations  taken  from  finan- 
cial publications,  also  by  cross-examination  of  railway 
witnesses,  but  never  have  we  been  able  to  substantiate 
the  propositions  in  the  manner  in  which  that  has  been 
done  in  the  present  case  upon  this  basic  issue. 

If  railway  credit  is  sound,  it  is  very  evident  that  in  the 
eyes  of  the  shrewdest,  ablest  financiers  of  the  country, 
railway  earnings  are  also  in  good  condition ;  and  if  rail- 
way credit  is  sound,  it  also  proves  that  the  railroads  are 
able  to  get  the  money  for  needed  additions  and  better- 
ments, if  they  desire  to  secure  the  same. 

Heretofore  our  analyses  have  made  comparisons  of 
market  prices  which  do  not  take  into  consideration  the 
length  or  duration  of  the  security,  and  consequently  they 
were  not  as  accurate  as  the  yield.  Another  objection 
that  has  always  been  made,  has  been  that  the  public 
prices  on  outstanding  securities  do  not  represent  the 
actual  price  the  corporation  has  to  pay  to  the  banker  for 
new  money.  Heretofore  we  have  found  it  practically 
impossible  to  answer  this  objection  although  we  thought 
it  was  not  sound. 

Mr.  Wade  on  the  witness  stand  testified  that  it  was 
impossible  to  get  that  figure,  that  it  was  a  matter  of  a 
personal,  private  nature,  that  companies  would  not  dis- 


152  CREDIT 

close.  In  the  present  case  we  have  completely  met  both 
of  these  objections ;  and  these  have  heretofore  been  prac- 
tically the  only  objections  raised  to  our  discussion  as  to 
railway  credit.  We  believe  we  are  now  able  to  present 
to  you  through  the  services  of  Mr.  Norton,  the  ablest 
review  of  railway  credit  that  has  ever  been  made  before 
any  tribunal.  The  work  which  we  have  performed  has 
only  incidental  reference  to  Mr.  "Wade 's  testimony.  That 
is  a  very  minor  reason  for  our  investigation.  We  have 
undertaken  to  give  to  this  Commission,  a  reliable  com- 
pilation properly  setting  forth  the  situation  as  to  railway 
credit  on  such  a  scale,  and  in  such  a  manner,  that  is  un- 
impeachable and  unanswerable.  We  have  gone  to  this 
trouble  and  expense  because  we  have  felt  this  is  probably 
the  dominating  issue  in  the  case,  and  it  should  be  thor- 
oughly tested  once,  at  least. 

It  may  be  that  the  facts  we  are  now  able  to  present  to 
you  would  not  have  been  established  in  the  Eastern  case. 
We  do  not  know  whether  that  is  true  or  not ;  suffice  it  to 
say,  that  we  do  now  present  them  to  you  as  to  these  west- 
ern railroads. 

The  principal  argument  advanced  by  railroad  com- 
panies in  support  of  the  proposition  that  their  credit 
is  impaired  is  the  fact  that  they  have  to  pay  higher  rates 
on  borrowed  capital  than  in  former  years,  and  market 
prices  on  bonds  of  the  same  denomination  have  been 
declining  during  recent  years,  resulting  in  a  gradually 
increasing  yield  upon  issues  of  bonds.  They  attempt  to 
charge  this  up  to  inadequate  freight  rates. 

Our  investigation  shows,  what  has  heretofore  been 
stated,  that  the  market  prices  on  railroad  bonds  have 
declined.  The  question  arises,  is  that  the  result  of  de- 
clining railway  credit,  or  is  it  the  result  of  other  causes? 

It  is  true  that  the  increase  in  the  yield  on  the  bonds  of  a 
given  company  could  result  from  a  gradual  impairment 
of  that  company's  credit,  because  of  adverse  legislation, 


CREDIT  153 

reductions  in  freight  rates,  advances  in  wages,  cost  of 
supplies,  etc.  On  the  other  hand  there  might  be  an 
increase  in  the  yields  on  those  bonds  due  to  changes  in 
the  general  financial  situation.  This  might  be  occasioned 
by  an  extraordinary  production  of  gold,  or  other  factors 
affecting  business  generally. 

In  other  words,  either  one  of  two  causes  may  produce 
an  increase  in  bond  yields:  First,  the  intrinsic  char- 
acter or  credit  of  the  company  itself ;  or  second,  the  gen- 
eral financial  situation.  Both  of  these  factors  may  be 
in  existence.  Those  factors,  one  group  opposing  the 
other,  are  consolidated  and  reflected  in  the  rate  at  which 
a  company  can  borrow  money  at  any  given  time.  Four 
and  a  half  per  cent  bonds  may  sell  at  a  less  rate  than 
formerly,  not  because  of  any  unpaid  earnings  of  the  com- 
pany itself ;  but  because  the  money  rate  has  gone  up.  If 
that  be  the  case  you  could  make  a  ten  or  fifteen  per  cent 
advance  in  freight  rates,  and  yet  4*4%  bonds  of 
representative  railroads  would  still  be  commanding  less 
prices  than  in  former  years,  because  of  the  gold  supply. 
Our  task  is  to  determine,  if  possible,  whether  the 
credit  of  these  railway  companies  has  increased,  or  declin- 
ed. It  is  true  market  prices  on  4%  bonds  have  declined. 
We  want  to  know  what  caused  it.  The  best  test  would  be 
to  find  out  the  increase  in  the  yield  on  a  representative 
group  of  these  railroads  and  compare  that  with  the  in- 
crease in  the  pure  money  rate.  The  pure  money  rate 
would  be  independent  of  those  other  factors,  such  as 
increased  operating  costs,  etc. 

The  true  test  of  the  effect  of  the  general  financial  situ- 
ation would  be  the  pure  money  rate  on  long  term  securi- 
ties, were  that  figure  attainable;  because  that,  in  itself, 
would  reflect  precisely  the  factor  to  which  we  have  re- 
ferred. The  next  best  test  is  the  closest  approach  we 
have  to  the  pure  money  rate,  which  is  represented,  we  be- 
lieve it  will  generally  be  conceded,  by  government  securi- 


154  CREDIT 

ties  and  the  bonds  of  the  highest  class  of  municipalities, 
where  innumerable  personal  factors  of  hazard  and  risk  in 
the  business  itself  are  eliminated  to  the  largest  possible 
extent.  If  the  yield  upon  the  bond  of  a  company  engaged 
in  private  business  increases  greater  than  the  pure  money 
rate,  then  that  is  evidence  that  the  credit  of  the  said  com- 
pany has  declined  during  the  period  of  time  covered. 
On  the  other  hand,  if  the  yield  of  the  said  company  has 
increased  at  a  less  proportion  than  the  pure  money  rate, 
then  that  shows  that  the  credit  of  said  company  is  on  a 
better  plane  in  the  latter  portion  of  the  period  covered. 
It  is  for  the  purpose  of  applying  this  test  to  railway 
securities  that  we  have  compiled  the  actual  yields  on  the 
bonds  of  the  four  greatest  nations  in  the  world  whose 
securities  are  quoted,  and  second,  the  twenty  largest 
cities  in  this  nation.  These  we  compare  to  the  yields 
upon  the  securities  of  representative  railroads  in  this 
territory.     (Norton  Ex.  3,  page  1.) 

Taking  the  bonds  of  the  Northwestern  railroads  run- 
ning from  1900  to  1914  inclusive,  we  find  there  is  an 
increase  in  the  yield  of  .6%,  or  an  increase  over  1900  of 
15%.  On  the  Burlington  this  increase  amounted  to  16%. 
On  the  Milwaukee  19%;  on  the  St.  Paul,  Minneapolis  & 
Omaha,  a  decline  of  about  8%.  On  the  Great  Northern,  an 
increase  of  10%.  Minneapolis  &  St.  Louis,  an  increase 
of  55%.  Northern  Pacific,  7%.  Union  Pacific,  9.8%, 
making  an  average  increase  on  all  of  approximately  15%. 

Mr.  Wade  on  cross-examination  stated: 

"Mr.  Thorne :  Would  you  give  your  opinion  as  to 
whether  there  has  been  a  decline  in  the  market  prices 
of  municipal  bonds  during  the  past  ten  years  1 

"Mr.  Wade:  Yes,  and  no.  It  depends  entirely 
upon  the  municipal  bonds. 

"Mr.  Thorne :  Can  you  name  any  large  municipal- 
ity of  the  twenty  largest  cities,  say,  in  the  country? 

*  \  Mr.  Wade :   How  would  New  York  do  ? 


CREDIT  155 

"Mr.  Thome  (continuing) : — where  there  has  not 
been  a  decline  since  1900? 

"Mr.  Wade:    Oh,  yes. 

"Mr.  Thorne:    What? 

"Mr.  Wade:    St.  Louis. 

"Mr.  Thorne:  What  was  the  security  and  the 
price  ? 

"Mr.  Wade:    The  city  bonds,  4%  par. 

"Mr.  Thorne:    Maturity? 

' l  Mr.  Wade :   Well,  usually  twenty  or  thirty  years. 

1  ■  Mr.  Thorne :  You  say  the  price  was  higher  last 
year  than  it  was  ten  years  ago  ? 

"Mr.  Wade:  No,  it  is  about  the  same."  (tr. 
362-363.) 

That  testimony  is  a  remarkable  example  of  pure  fiction. 
The  increase  in  the  yield  on  St.  Louis  bonds  since  1900 
has  been  25%,  as  shown  on  Norton  Exhibit  3.  Further 
Mr.  Wade  testified: 

"Mr.  Thorne:  Can  I  ask  your  judgment,  from 
your  general  knowledge  of  the  situation,  as  to 
whether  there  has  been  a  decline  or  an  increase  in 
the  market  prices  of  representative  municipal  bonds  ? 

"Mr.  Wade:  What  do  you  call  representative 
municipal  bonds? 

"Mr.  Thorne:    What  would  you  call  them? 

"Mr.  Wade:    St.  Louis. 

' '  Mr.  Thorne :    What  others  ? 

"Mr.  Wade:    Well,  that  is  enough. 

"Mr.  Thorne:  There  are  a  few  other  representa- 
tive municipalities  in  this  country. 

"Mr.  Wade:    Very  likely  so. 

"Mr.  Thorne:  Consider  the  twenty  largest  cities 
of  the  country;  consider  the  municipal  bonds  of 
those  twenty  cities;  what  would  be  your  judgment 
whether  there  had  been  a  decline  or  increase  in  the 
majority  of  those  securities  ? 

"Mr.  Wade:  If  you  take  New  York  out  of  that 
category,  you  will  find  that  municipal  bonds  have 


156  CREDIT 

been  about  steady,  and  the  variation  in  them  has  not 
been  one-tenth — one-fifteenth  in  price  in  ten  years, 
as  against  the  railroad  bonds. 

"Mr.  Thome:     We  will   stand  on  that  answer, 
your  Honor."    (tr.  363-364.) 

Here  is  another  wholesale  misrepresentation  of  the 
true  situation.  Instead  of  the  prices  remaining  steady, 
they  have  actually  declined  31%,  as  shown  in  Norton 
Exhibit  3.  The  increase  in  the  yield,  or  the  decline  in 
the  price  on  the  government  bonds  of  the  United  States, 
England,  France,  and  Germany,  amounted  to  over  17%. 

The  Northwestern  group  of  railroad  bonds  increased 
in  yield  15%  during  the  same  period.  In  other  words,  the 
decline  in  the  price  in  these  railroad  bonds  has  been  at  a 
less  rate  than  the  decline  in  the  price  on  government 
bonds,  or  those  of  the  twenty  largest  cities  in  the  United 
States.  This  proves  that  the  credit  of  these  companies 
has  increased  substantially  since  1900. 

Mr.  Norton  testified  that  it  would  generally  be  con- 
ceded that  the  yield  on  government  bonds  was  probably 
slightly  below  the  pure  money  rate,  because  of  special 
privileges,  etc.,  accompanying  such  bonds;  and  further, 
that  the  municipal  bonds  were  slightly  above  the  pure 
money  rate  because  of  some  element  of  hazard  in  connec- 
tion with  them,  exceeding  that  of  a  government  bond.  In 
other  words,  that  the  pure  money  rate  lies  in  that  zone 
somewhere,  between  those  two  boundary  lines.  He  con- 
cluded that  it  would  be  fair  to  take  the  mean  between 
those  two  lines,  as  the  closest  approximation  that  we 
can  obtain  to  the  pure  money  rate.  This  pure  money 
rate  becomes  the  test,  the  yardstick  of  the  situation.  It 
can  be  applied  to  any  individual  company  or  any  class 
of  companies.    (Norton  Exhibit  3,  Vol.  1,  page  36.) 

During  the  period  1900-1914,  we  find  this  approximate 
pure  money  rate  to  have  increased  from  3.02  to  3.77,  an 
increase  of  24.8%,  as  compared  with  an  increase  in  the 


CREDIT  157 

yield,  representing  a  decline  in  the  prices,  on  western 
railroad  bonds  amounting  to  15%. 

By  this  statement  we  do  not  intend  to  say  that  the 
Northwestern  group  of  railroads  has  a  better  credit  than 
the  United  States  government,  or  the  twenty  largest 
cities  in  this  nation.  On  the  contrary,  securities  of  that 
character  will  probably  always  have  a  better  credit  than 
private  companies.  That  is  the  price  we  are  paying  for 
private  ownership. 

These  statistics  simply  demonstrate  that  the  credit  of 
railroads  has  improved,  not  that  the  credit  of  govern- 
ments has  declined.  The  government  has  been  estab- 
lished. The  railroad  is  getting  onto  a  better  plane,  a  more 
solid  foundation.  There  is  a  slight  variation  from  year 
to  year  that  simply  demonstrates,  again,  the  necessity  of 
making  your  review  over  an  extended  period  of  time, 
rather  than  over  a  few  years. 

In  the  following  table,  we  give  the  pure  money  rate  in 
the  first  column ;  in  the  second  column  is  given  the  aver- 
age yield  on  the  Northwestern  group  of  railroads ;  in  the 
third  column,  the  average  yield  on  the  Southwestern 
group  of  railroads;  in  the  fourth  column,  the  average 
yield  of  the  Western  and  Southwestern  consolidated;  in 
the  fifth  column,  the  so-called  coefficient  of  relative 
credit,  which  represents  the  ratio  of  the  pure  money  rate 
to  the  Western  railroad  bonds;  in  the  sixth  is  the  said 
coefficient  of  relative  credit  applied  to  the  Western  and 
Southwestern  railroad  bonds  combined. 


168 


CREDIT 


Q 
B 

a 

■ 
> 

I— I 
H 

< 

H 

3 

b 
O 
H 

H 

i— i 

O 

g 

i 

O 


^ 

t» 

T-l 

t~-            kO            T-J                     00                    00                             1" 

CO        «*        US               -W"               CO                    00 

00                     r- 

CO 

8 

r-1 

oo      ©      ©           oo           ©               to 

0k 
r-l 

co       <*       us           -*'           co                ai 

oo                   t- 

« 

© 

r-l 

Irt          CO          t>                 US                 US                        00 

tH 

CO         'T         "*               "*               CO                      © 

oo                  t- 

tH 

IA 

r-1 

■        n        ©              -*<              US                   r- 

co      «*      ^"           ■♦           **               © 

oo               oo 

© 

■* 

r-l 

Ifi         N         «               ■*               CO                      US 

© 

T-l 

CO        •<»"        **•              •*"              ^«                     © 

oo               oo 

© 

r-l 

o 

•*        r-J        ^r             N             N                   C4 

© 

T-l 

CO         ■*«         «*                "*               CO                      rH 

oo              oo 

oo 

t- 

o 

«       N        b              US              t>                     tH 

© 
tH 

co     -«<|j;  W           •«"           ©               t-i 

00                      t- 

t- 

CM 

o 

^      <6      t-           us           t-               © 

© 

1-t 

CO         -»<         "<r'               ■*»              r-^                    to 

t-               t- 

«D 

c* 

o 

cs;      ©      •*           c<;           us               t> 

39 
r-l 

CO         -*r         •*■'               "*              ©                     © 

oo                 t- 

US 

rH 

o 

tH          ©          CO                 tH                 C-;                        © 

© 
r-l 

CO       CO       ^*             ^             ©                  us 

t-               t- 

•* 

t- 

O 

r-J         r-J         US               CO               CO                      t-; 

© 
r-l 

CO         ^i         **               "#                t>                      CO 

t-                      t- 

CO 

00 

o 

©         iH         ©               CO               t-J                      © 

tH 

c:          -—'         ~r                "*J               US                      r* 

t-                        C- 

W 

us 

© 

©         ©         "*                t-J               «NJ                      ■*< 

© 

T-l 

CO       CO       ^             •<*             00                  •*« 
t-               t- 

iH 

r-l 

© 

©          ©          TjJ                 r-J                 «                        <# 

© 

r-l 

CO        CO        ^             •*«              t-^                   CO 

t-               t- 

© 

CM 

© 

©      ©      oo           co           -<*•               csj 

© 
r-l 

co      co      ^           ■*>           t>               © 

r>                   t- 

Average    Actual 
Municipals    and 

s — Western  Rail- 
1 

a 
u 
© 

GO 
© 

•s 

-u 

o 
m 

u 

oo  a 

^  © 

si 

©o 

f. 

03  cs 

N2  2 

e  Credit  (Ratio  of 
our  Governments 
era  Railroads) . . . 
e  Credit  (Ratio  of 
our   Governments 
3tern   and    South- 

»rt        T5  TJ   ©  a 

Rate- 
sin    of 
nments 
al  Yieli 
Bonds) 
al  Yiel 
41  Bon 
ual    Yi 
rn    Rai 

Relativ 
and   F 
o  West 
Relativ 
and   F 
to   Wei 
ilroads 

ure    Money 
Yields— Mei 
Four  Gover 
verage  Actu 
roads — (45 
verage  Actu 
Railroads  ( 
verage    Act 
Southweste 
(86  Bonds) 
oefficient  of 
Municipals 
Combined  t 
oefficient  of 
Municipals 
Combined 
western  Ra 

Ph           < 

< 

< 

U        O 

CREDIT 

In  the  foregoing  table  the  Northwestern  group  of  rail- 
roads (corresponding  to  what  Mr.  Norton  called  the  West- 
ern group)  includes  all  of  the  bonds  of  all  the  railroads 
in  the  Northwestern  group,  which  were  quoted  substan- 
tially continuously  from  1900  to  1914  in  the  New  York 
Commercial  and  Financial  Chronicle,  and  embraces  the 
following  railroads:  Chicago,  Burlington  &  Quincy;  Chi- 
cago, Milwaukee  &  St.  Paul;  Chicago  &  North  Western; 
Chicago,  St.  Paul,  Minneapolis  &  Omaha;  Great  Northern; 
Minneapolis  &  St.  Louis;  Northern  Pacific  and  Union 
Pacific.  The  Southwestern  group  includes  the  following: 
Atchison,  Topeka  &  Santa  Fe;  Chicago,  Rock  Island  & 
Pacific;  Colorado  &  Southern;  Kansas  City  &  Southern; 
Missouri,  Kansas  &  Texas;  Missouri  Pacific;  Southern 
Pacific;  St.  Louis  &  San  Francisco;  St.  Louis  &  South 
Western.  This  list  includes  all  of  the  railroads,  any  of 
whose  securities  were  quoted  substantially  continuously 
between  1900  and  1914,  such  railroads  being  embraced  in 
the  Commission's  original  suspension  order  in  this  case, 
and  serving  the  Southwestern  Tariff  Committee  Terri- 
tory, excluding  only  those,  two-thirds  of  whose  mileage 
lies  outside  of  said  territory.  There  is  only  one  exception 
to  this — the  Southern  Pacific  Company  was  taken  in  lieu 
of  its  subsidiaries. 

It  will  be  noted  that  the  yield  on  the  Southwestern 
bonds  is  considerably  higher  than  on  the  Northwestern 
bonds.  This  is  graphically  shown  in  the  accompanying 
chart  "Z."  The  chart  represents  the  relative  plane  of 
credit,  the  pure  money  rate  being  the  best.  Next  comes  the 
Northwestern  group  of  railroads,  and  next  the  Southwest- 
ern group  of  railroads.  The  increase  in  the  yield  on  the 
Southwestern  group  of  railroads  has  been  less  than  that 
on  the  Northwestern  group,  and  less  than  the  pure  money 
rate.  Again  we  state  that  this  does  not  indicate  that  the 
Southwestern  railroads  have  as  good  credit  as  the  other 
two ;  in  fact,  the  reverse  is  true,  as  everybody  knows,  and 
as  the  chart  proves.    It  does  mean,  however,  that  the 


160 


CREDIT 


Southwestern  group  of  railroads  have  been  getting  onto 
a  better  plane  during  recent  years.    They  have  become 


\ 

/ 

1 

\ 

\ 

i 

\ 

5 
5 

\ 
\ 

\ 

\ 

\ 

\ 

1 

\ 

1 

\ 

1 

i 

i 

\ 

1 

x 

i 

\ 

\ 

\ 

> 

\ 
1 

I 
• 
* 

>  1 

<2     | 
if  41 

S  ^j  O  w^S 

><  oif* 

/ 

i 
l 

i 

» 

| 

1 

/ 
i 

/ 

\ 

\ 

0 
• 

\ 

\ 

\ 

\ 

\ 

\ 

\ 

\ 

| 

— r~ 
\ 

\ 
\ 

\ 

J 

\ 
i 

S 

/ 

t 

/ 

I 

« 

i 

! 

i 

\ 

i 

| 

\ 

\ 

\ 

\ 

| 

1 

0 

1 

! 

) 

• 
• 

/ 

-*- 

i 

' 

! 

• 

\ 

> 

V 

i 

"> 

c 

J 

CHART  Z. 


CREDIT  161 

more  established.  They  have  made  more  progress  than 
the  Northwestern  group ;  they  had  more  room  for  progress 
as  the  chart  itself  indicates. 

ARE  THE  SECURITIES  OF  WESTERN  RAILROADS  ATTRACTIVE 
TO  INVESTORS? 

Are  railroad  securities  unattractive  investments  1  Who 
is  the  best  judge  whether  railroad  securities  are  attractive 
or  not  ?  Unquestionably  that  man  is  the  investor  himself. 
There  are  a  few  facts  about  this  subject  of  credit  which 
can  be  conclusively  established  by  the  records  of  the  mar- 
ket places  of  the  country  for  such  securities. 

Credit  is  determined  by  the  rate  at  which  any  person  is 
able  to  borrow  money.  If  a  person  can  borrow  a  given 
amount  of  money  at  a  cheaper  rate  than  another  person, 
his  credit  is  better  than  that  of  the  other  party.  That 
rate  at  which  one  can  borrow  money  is  the  crystallization 
of  all  the  multitude  of  factors  that  go  into  the  determina- 
tion of  a  man's  credit. 

Mr.  Wade  testified: 

1 '  Mr.  Wright :  What  I  am  interested,  Mr.  Wade,  in 
drawing  out  here,  is  the  general  credit  of  these  roads 
in  the  West,  and  how  it  compares  with  other  credit 
or  credits  of  other  institutions,  and  whether  there  is 
a  difference  in  the  situation  of  their  credit  which  has 
been  increased  in  the  last  few  years. 

"Mr.  Wade:  There  is  distinct,  emphatic  and  un- 
equivocal extra  charge  put  upon  the  railroad  of  50  to 
75%  for  the  use  of  its  money,  as  against  the  manufac- 
turing and  mercantile  and  other  commercial  parts  of 
the  country  for  the  same  general  kind  of  credit."  (tr. 
313-314.) 

That  statement  is  not  correct.  Mr.  Norton  reports  he 
finds  the  opposite  to  be  true  amongst  the  banking  houses 
of  New  York  City.  (tr.  14299-14300.)  Mr.  Norton's  ex- 
perience with  these  matters  may  be  summarized  as 
follows : 


162  CREDIT 

Report-writer  for  a  banking  house  and  in  charge  of 
actuarial  computations  on  government  bonds ;  also  in  the 
general  bond  markets.  Was  with  Fiske  &  Robinson,  and 
Eugene  Meyers,  Jr.  &  Co.  With  the  latter  firm  he  was  a 
general  report  writer,  for  several  years,    (tr.  4409.) 

In  the  abstract  of  the  record  we  reproduce  a  copy  of 
correspondence  with  Mr.  Felix  Warburg,  of  Kuhn,  Loeb 
&  Co.,  New  York  City,  which  is  self-explanatory.  This 
was  not  permitted  to  become  a  technical  part  of  the 
record,  but  is  filed  with  the  Commission  as  a  part  of  the 
correspondence  in  connection  with  the  case. 

Mr.  Norton  supplemented  this  investigation  by  an  ex- 
haustive analysis  of  the  market  prices  of  the  securities  of 
railway  and  other  companies,  generally,  in  the  United 
States,  to  test  the  accuracy  of  Mr.  Wade's  claim,  stated 
above. 

As  his  authority  for  market  prices  on  securities,  Mr. 
Norton  used  the  New  York  Commercial  and  Financial 
Chronicle.  Concerning  the  reliability  of  this  publication 
Mr.  Wade  testified : 

1 '  Mr.  Thorne :  Mr.  Wade,  is  there  any  public  record 
of  sales  of  securities  listed  on  the  New  York  stock 
exchange  ?  That  is,  a  record  that  is  published  by  per- 
sons of  such  a  character  that  it  commands  the  con- 
fidence of  the  bond  houses  and  people  in  the  banking 
business? 

"Mr.  Wade:    Yes,  sir. 

"Mr.  Thorne:  What  would  you  suggest, — the  Fi- 
nancial Chronicle,  is  that  reliable? 

1 '  Mr.  Wade :    Quite  so. 

1 *  Mr.  Thorne :    Substantially  so  ? 

1 '  Mr.  Wade :    Very  much  so. 

1 '  Mr.  Thorne :    Is  there  any  better  in  the  country  ? 

' ' Mr.  Wade;  No,  I  think  it  is  about  as  good  as  any 
in  the  country.  The  Analyst  of  the  Times,  perhaps, 
is  one  also."    (tr.  335.) 

Norton  Exhibit  4  contains  a  list  of  the  best  class  of  in- 


CREDIT  163 

dustrial  and  public  utility  securities,  that  are  quoted  at 
the  leading  market  on  this  continent.  In  this  list  Mr. 
Norton  gathered  together  all  of  the  bond  issues  of  all  the 
industrials  that  are  quoted  substantially  continuously, 
from  1900  to  1914,  in  the  New  York  Commercial  and  Fi- 
nancial Chronicle. 

In  this  table  we  have  the  securities  of  36  representative 
industrial  companies  of  all  classes  including  manufactur- 
ing and  industrial,  coal  and  iron,  telephone  and  telegraph, 
electric  light  and  power,  and  miscellaneous  bonds.  The 
average  yield  on  these  bonds  in  1914  was  5.9% ;  in  1913  it 
was  5.7% ;  in  1910  it  was  5.4%.  In  other  words,  last  year 
these  industrials  as  a  whole  had  to  pay  almost  6%  for 
their  money. 

In  Norton  Exhibit  3  we  have  gathered  together  all  of 
the  bonds  of  all  the  railroads  involved  in  this  case,  that 
are  quoted  substantially  continuously  between  the  same 
years,  1900  to  1914.  In  the  Northwestern  group  of  rail- 
roads there  were  45  such  bonds,  the  summary  of  which  is 
shown  on  page  14  of  said  exhibit.  The  average  yield  on 
these  45  bonds  was  4.5%.  In  other  words  the  industrials 
as  a  whole,  had  to  pay  31%  more  for  their  money  than  did 
these  Northwestern  railroads,  in  spite  of  the  amazing 
declaration  by  Mr.  Wade  that  the  railroads  had  to  pay 
from  50%  to  75%  more  than  the  manufacturing  and  in- 
dustrials. When  Mr.  Wade  was  asked  to  give  the  facts 
upon  which  he  based  such  a  startling  conclusion  he 
couldn't  give  any  facts.  He  could  not  name  the  rate  at 
which  any  of  these  railroads,  with  only  two  exceptions, 
were  able  to  borrow  money,  and  those  two  exceptions  were 
the  Missouri,  Kansas  &  Texas  and  the  Missouri  Pacific, 
two  of  the  weakest  properties  in  the  territory. 

He  was  asked  several  times  to  state  the  rate  at  which 
other  railroad  companies  in  this  territory  could  borrow 
money.  Every  time  he  admitted  he  could  not  state,  and 
finally  admitted  he  was  not  acquainted  with  it  because 


164  CREDIT 

those  companies  did  not  borrow  their  money  in  the  West, 
that  the  bankers  in  the  West  were  too  small,  and  that 
they  went  East  for  their  money,    (tr.  352.) 

Is  our  list  of  Northwestern  railroads  representative? 
Let  us  see.  We  have  used  6  bonds  of  the  Chicago,  Bur- 
lington &  Quincy;  6  of  the  Milwaukee;  10  of  the  Chicago 
&  North  Western;  3  of  the  Chicago,  St.  Paul,  Minneapolis 
&  Omaha;  6  of  the  Great  Northern;  3  of  the  Minneapolis 
&  St.  Louis ;  7  of  the  Northern  Pacific,  and  4  of  the  Union 
Pacific,  having  excluded  those  railroads  having  over  one- 
half  or  two-thirds  of  their  mileage  outside  of  the  territory. 
We  have  included  in  this  list  the  securities  of  every  inter- 
state railroad  serving  this  territory  with  only  one  excep- 
tion, the  Soo  Line — Minneapolis,  St.  Paul  &  Sault  Ste. 
Marie,  a  company  having  splendid  credit,  as  evidenced  by 
the  fact  that  they  were  able  to  borrow  $1,800,000  in  round 
numbers,  in  1914,  a  period  of  high  yields,  at  a  rate  of  4.5%, 
this  figure  including  all  commissions,  expenses  and  dis- 
counts. (Norton  Exhibit  5,  page  22.)  The  reason  this  com- 
pany was  not  included  in  the  previous  table,  referred  to 
as  Norton  Exhibit  3,  page  14,  is  because  none  of  their 
securities  run  through  the  period  1900  to  1914  inclusive. 

Keeping  in  mind  the  average  on  the  industrials  of  5.9%, 
let  us  consider  these  individual  companies.  The  average 
on  the 

Burlington  bonds 4.3% 

Milwaukee 4.4% 

Chicago  &  North  Western 4.5% 

Chicago,  St.  Paul,  Minneapolis  &  Omaha.  .3.5% 

Great  Northern 4.4% 

Minneapolis  &  St.  Louis 5.7% 

Northern  Pacific 4.7% 

Union  Pacific 4.5% 

In  every  instance  the  yield  was  25%  less  than  that  on 
the  industrials  with  only  one  exception,  and  that  was  the 
Minneapolis  and  St.  Louis,  and  even  this  one  was  less  than 
the  average  on  the  industrials.    The  Minneapolis  &  St. 


CREDIT  165 

Louis  is  not  a  representative  railroad  in  any  sense  of  the 
word  and  cannot  be  accepted  as  a  standard.  This  the 
Commission  itself  held  in  its  decision  in  the  Western  Ad- 
vance Rate  Case  of  1910. 

No  carriers  in  this  case  made  a  claim  that  that  company 
was  representative.  Not  a  witness,  who  was  asked  to 
state  the  representative  typical  lines  in  this  territory, 
made  any  mention  of  the  Minneapolis  &  St.  Louis. 

Further,  we  find  that  these  railroads  had  a  better  credit 
last  year — notwithstanding  their  repeated  cries  of  wolf, 
claims  of  panic,  and  crises — they  had  a  better  credit  and 
were  able  to  borrow  their  money  cheaper  than  any  class 
of  industrials. 

First:  If  you  will  refer  to  Norton  Exhibit  4,  page 
3  (Volume  I,  sheet  No.  72-c),  you  will  notice  that  five 
representative  manufacturing  and  industrial  securities  of 
the  highest  type,  including  the  American  Cotton  Oil, 
American  Spirits,  American  Thread,  American  Writing 
Paper  and  International  Paper,  had  an  average  yield  on 
their  bonds  of  7.3%,  and  excluding  the  American  Writing 
Paper  which  is  abnormally  high,  the  average  is  5.7%, 
which  is  practically  one-fourth  greater  than  that  of  the 
Northwestern  group. 

Second:  On  the  same  page  is  shown  the  yields  on  coal 
and  iron  bonds.  With  only  one  exception,  that  of  the 
Lehigh  Coal  &  Navigation  Co.,  the  yield  on  the  bonds  in 
that  series  is  greater  than  the  average  on  the  Northwest- 
ern railroads.  The  average  yield  on  the  coal  and  iron 
bonds  is  5.5%,  which  is  approximately  one-fourth  higher 
than  that  on  the  Northwestern  railroads. 

This  is  exclusive  of  the  Wilkesbarre  security  which  if 
included,  would  make  the  average  still  greater  on  the 
industrials. 

Third :  In  the  Telephone  and  Telegraph  bonds  we  have 
the  highest  class  of  securities  represented,  including  the 


166  CREDIT 

Western  Union,  the  Chesapeake  &  Potomac,  the  Cumber- 
land, and  New  York  &  New  Jersey.  In  every  instance  the 
yield  on  these  securities  is  greater  than  the  average  on 
the  Northwestern  railroads.  The  average  on  the  Tele- 
phone and  Telegraph  bonds  is  4.9%. 

Fourth :  Under  Miscellaneous  bonds,  we  have  a  dozen 
high-class  securities  represented.  The  reason  we  say  they 
are  high-class  is  the  proposition  Mr.  Wright  himself  ad- 
vanced that  the  older,  better-established  companies  are 
the  ones  whose  securities  run  back  to  1900.  We  find  here 
in  every  instance  the  yield  on  the  industrial  higher  than 
the  average  on  the  railroads.  The  average  of  these  twelve 
industrial  securities  amounts  to  6.3%,  which  proves  again 
that  the  railroads  get  their  money  cheaper  than  the  in- 
dustrials. 

Fifth:  The  only  electric  light  and  power  bond  running 
through  the  period  is  the  Niagara  Falls  Power  5  's  giving 
a  yield  of  4.9%.  This  of  course  is  a  high-grade  security 
and  well  seasoned,  and  commands  the  confidence  of  the 
public.  We  find  the  average  of  the  industrials  is  over 
20%  higher  than  the  yield  on  this  security.  It  is  there- 
fore a  much  higher  grade  security  than  the  average  in- 
dustrial bond,  and  yet  we  find  the  Northwestern  railroads 
are  paying  less  for  their  money  than  does  the  Niagara 
Falls  Power  Co. 

Turning  to  the  public  utilities  we  find  38  bonds  whose 
securities  run  through  the  period  from  1900  to  1914. 
Thirty-three  of  these  38  bonds  of  public  utilities  are  pay- 
ing more  for  their  money  than  the  Northwestern  rail- 
roads. The  average  yield  on  the  38  public  utility  bonds 
is  5.1%,  which  is  higher  than  the  average  on  the  North- 
western railroads. 

This  is  exclusive  of  the  10-23rd  St.  Ferry  Co.  security, 
on  which  the  yield  was  so  high  that  if  included  the  aver- 
age would  be  less  representative. 


CREDIT  167 

Because  of  the  foregoing  facts  so  far  as  the  Northwest- 
ern group  of  railroads  is  concerned,  we  must  conclude  that 
their  credit  is  superior  to  that  of  any  class  of  industrial 
or  public  utility  bonds  that  are  quoted  on  the  market.  We 
have  certainly  selected  a  high-grade,  typical,  representa- 
tive class  of  industrial  and  public  utility  securities  for  the 
purpose  of  comparison.  In  the  list  of  railroads,  we  have 
used  every  interstate  railroad  serving  the  territory,  pro- 
viding it  has  at  least  one-third  of  its  mileage  in  that 
territory. 

Are  the  figures  we  have  given  above  as  to  the  market 
prices  of  the  securities  of  these  companies,  a  sufficiently 
accurate  gauge  of  the  rate  at  which  these  people  can  se- 
cure money;  or  should  we  investigate  the  yield  on  new 
issues  of  securities  ? 

This  was  the  point  urged  by  the  Eastern  railroads 
which  we  did  not  attempt  to  meet.  We  did  not  at  that 
time  have  data  showing  the  yields  on  new  issues.  The 
same  objection  was  made  in  1910,  and  again  we  did  not 
have  the  data  to  meet  the  issue.  However,  we  are  for- 
tunate at  this  time  in  being  able  to  present  to  the  Com- 
mission the  most  comprehensive  analysis  of  yields  on  new 
issues  that  has  ever  been  made  by  any  person,  so  far  as 
we  have  been  able  to  ascertain.  The  railroads  secured  at 
our  request,  data  concerning  new  issues  of  their  securities 
from  1901  to  1914  inclusive.  They  divided  this  into 
two  groups:  the  period  from  1901  to  1907  inclusive  and 
1908  to  1914  inclusive.  We  have  only  attempted  an  anal- 
ysis of  the  latter  period;  because  of  the  work  involved, 
and  the  importance  in  this  particular  case,  we  have  con- 
fined our  investigation  to  those  years. 

In  Norton  Exhibit  5  we  have  gathered  together  the  par 
value,  and  net  proceeds,  above  all  commissions,  discounts 
and  other  expenses,  of  all  the  new  issues  on  the  Western 
and  Southwestern  railroads  between  the  years  1908  and 
1914  inclusive.    Also,  we  have  similar  data  on  all  of  the 


168  CREDIT 

industrials  and  public  utilities  for  which  we  could  secure 
such  information.  This  includes  all  of  the  industrials  and 
public  utilities  in  the  City  of  New  York,  and  the  state  of 
New  York,  and  the  state  of  Massachusetts  that  had  to 
secure  the  consent  of  the  Commissions  in  that  city  and 
those  states,  before  the  issues  could  be  made.  Also,  we 
have  included  the  yields  on  a  number  of  industrials,  in- 
cluding the  United  States  Steel  Corporation,  and  all  of 
its  subsidiaries.  This  list  of  industrials  and  public  util- 
ities is  not  in  any  sense  of  the  word  whatever,  a  selected 
list;  it  simply  includes  all  of  those  we  have  described  in 
the  states  of  New  York  and  Massachusetts,  and  all  of  the 
industrials  we  were  able  to  obtain,  comprising  a  very  rep- 
resentative class  of  high  grade  securities. 

Concerning  the  use  of  this  exhibit,  there  are  a  few  per- 
tinent comments  that  should  be  made.  In  the  first  place, 
the  yields  on  new  issues  of  such  representative  railroads 
as  the  Chicago,  Burlington  &  Quincy,  Chicago  &  North 
Western,  Minneapolis,  St.  Paul  and  Sault  Ste  Marie,  Chi- 
cago, St.  Paul,  Minneapolis  &  Omaha,  Southern  Pacific 
and  Santa  Fe,  will  be  found  very  close  to  the  yields  ar- 
rived at  by  the  use  of  current  quotations  on  outstanding 
bonds.  In  other  words,  the  exhibit  on  new  issues  is  a  com- 
plete confirmation  of  the  reliability  of  the  current  market 
quotation  on  outstanding  securities  as  an  index  of  rail- 
way credit  for  representative  railroads.  A  few  examples 
will  be  given. 

Take  the  year  1914;  the  yield  on  the  new  issues  of  the 
Chicago  &  North  Western  is  4.4%.  This  figure  is  arrived 
at  after  making  due  allowance  for  all  commissions,  dis- 
counts and  expenses  connected  with  the  issue.  The  yield 
on  the  outstanding  securities  of  the  same  company  ar- 
rived at  by  means  of  current  quotations  on  the  market  is 
4.5%,  a  variation  of  1-10  of  1%.  The  small  yield  on  one 
of  these  railroad  bonds  was  due  to  the  fact  that  the  own- 
ership of  this  bond  carried  with  it  the  right  to  exchange 


CREDIT  169 

for  another  bond  at  a  higher  yield,  covering  a  longer 
period  of  years,  partaking  somewhat  of  the  nature  of  a 
right  to  purchase  stock  at  or  below  market  price. 

During  the  same  year,  1914,  the  Burlington  paid  4.4% 
for  new  money.  An  average  arrived  at  by  the  use  of  cur- 
rent quotations  on  the  market  for  outstanding  securities 
is  4.3%,  a  variation  of  1-10  of  1%. 

The  same  situation — the  reliability  of  the  current  quo- 
tations as  an  index  of  credit — is  further  confirmed  by  tak- 
ing the  consolidated  figures  for  all  of  the  Northwestern 
railroads,  1908  to  1914  inclusive.  The  average  yield,  using 
new  issues,  in  1908  was  4.5%;  using  current  market  quo- 
tations, 4.3%.  In  1909  using  new  issues,  4.1% ;  using  mar- 
ket quotations  4.1%.  In  1910  using  new  issues  4.1%; 
using  market  quotations  4.2%.  In  1911  using  new  issues 
4.5%;  using  market  quotations  4.2%.  In  1912  using  new 
issues  4.7% ;  using  market  quotations  4.3%.  In  1913  using 
new  issues  4.5%;  using  market  quotations  4.6%.  In  1914 
using  new  issues  4.6%;  using  market  quotations  4.5%. 
Taking  any  representative  railroad  the  same  fact  is  estab- 
lished. The  North  Western  has  been  constantly  referred 
to  as  a  typical  railroad  in  this  territory. 

In  1914  this  railroad  issued  $8,000,000  in  gold  bonds 
at  a  yield  of  4.4%.  Compare  that  figure  with  the  following 
yields  arrived  at  by  the  use  of  market  quotations,  as 
shown  on  page  5  of  Norton  Exhibit  3,  4.4%,  5.2%  (sink- 
ing fund),  4.6%,  4.7%,  4.4%,  3.3%  (a  security  maturing 
April  1,  1915,  and  is  explained  by  the  witness.  Bonds  of 
well  established  railroad  properties  as  they  approach  ma- 
turity, approximate  close  to  the  pure  money  rate)  4.5%, 
4.4%,  4.7%,  4.3%.  Taking  a  straight  average  we  find  the 
average  of  yields  to  be  4.4%  compared  with  the  average 
on  new  issues  4.4%. 

A  similar  comparison  was  made  relative  to  the  Burling- 
ton while  the  witness  was  on  the  stand. 


170  CREDIT 

Another  very  representative  railroad  in  this  territory, 
which  is  average  and  typical  is  the  Chicago,  Milwaukee 
&  St.  Paul.  This  company  refused  to  give  information 
concerning  its  new  issues  of  1914.  However,  we  do 
have  the  data  concerning  its  issue  of  $30,000,000  in  1913, 
whereon  the  yield  was  4.6%.  Compare  that  yield  on  new 
issues  with  the  following  yields  arrived  at  by  market 
quotations  as  shown  on  page  5,  Norton  Exhibit  3:  4.3%, 
4.3%,  4.6%,  4.5%,  4.6%,  4.5%. 

On  the  whole  when  a  large  number  of  securities  are 
under  consideration,  we  find  it  is  safe  to  conclude  that 
the  current  market  quotations  are  the  most  reliable  index 
of  credit  which  we  have  for  representative  railroads. 
This  proposition  is  further  evidenced  by  the  fact  that  the 
close  inside  relationship  between  the  large  banker  and  the 
directorate  of  a  corporation,  may  make  it  possible  for  the 
banker  to  secure  an  exorbitant  commission,  which  would 
make  the  resulting  yield  not  typical  of  the  credit  of  the 
company.  The  best  evidence  of  the  credit  of  a  company 
is  the  demand  of  the  investors  on  the  market  place  where 
there  is  actual  competition  in  the  purchase  and  sale  of 
securities,  and  not  the  price  in  some  private  back  office, 
where  the  intercorporate  relationship  is  made  to  subserve 
the  financial  gains  of  an  interested  party. 

It  may  be  claimed  that  the  banker  will  make  more  ex- 
haustive and  intelligent  analyses  of  the  financial  condi- 
tion of  a  company,  than  the  common  investor  on  the  mar- 
ket place  who  is  speculating  as  to  futures.  That  is  true 
temporarily  speaking,  but  there  is  on  the  market  place 
not  only  a  reflection  of  the  judgment  of  one  or  two  intel- 
ligent men  with  large  resources,  but  there  is  a  large  group 
of  interests  constantly  in  touch  with  market  prices  on 
the  securities  of  our  representative  railroad  companies. 
The  banker  getting  the  inside  bottom  price  will  not  let 
loose  of  his  security,  for  less  than  its  fair  value,  regard- 
less of  his  handsome  margin.    Then  on  the  market  in- 


CREDIT  171 

vestors  include  large  insurance  companies  of  the  country, 
large  bankers  and  trust  companies,  as  well  as  the  man- 
agement of  many  large  estates,  constantly  in  search  of 
good  investments  and  it  is  this  interplay  and  constant 
competition  of  the  great  investors  of  the  country,  with 
enormous  resources  back  of  them,  which  dominate  the 
trend  in  market  quotations  over  a  long  series  of  years. 
Now  and  then  the  speculator  fails  to  estimate  correctly 
what  the  permanent  investor  is  going  to  do ;  but  the  per- 
manent investor  is  the  controlling  force,  and  it  is  his 
judgment  on  the  market  place,  that  gives  us  our  best  in- 
dex of  the  true  credit  of  a  given  company. 

Our  comments  above  have  related  to  long  term  secur- 
ities and  those  of  representative  companies.  What  we 
have  said  as  to  the  close  relationship  between  the  market 
prices,  and  the  rate  on  the  yields  on  new  issues,  does  not 
apply  to  weak  companies,  or  to  short  term  obligations. 
The  reasons  we  have  given  above  for  claiming  that  the 
market  quotations  furnish  the  best  test,  rather  than  new 
issues,  as  to  the  credit  of  a  company,  apply  with  double 
force  as  to  the  new  issues  of  weak  companies — companies 
that  are  not  well  established — companies  who  are  hard  up 
for  money,  and  that  are  being  milked  by  a  few  financial 
pirates. 

The  Frisco  gives  an  interesting  illustration  of  that  fact. 
In  1914  we  find  the  yield  on  a  new  issue  of  the  Frisco  to 
be  13.1%.  Market  quotations  on  outstanding  issues  for 
the  same  year  (page  21  Norton  Exhibit  3)  show  a  yield 
of  5.2%.  Some  person  secured  a  handsome  margin  in 
this  case. 

On  the  Southwestern  Railroads  we  find  the  following: 
The  yield  on  the  new  issue  of  the  Denver  &  Rio  Grande 
was  5%.  The  yield  arrived  at  by  the  use  of  current  mar- 
ket quotations  was  ascertainable  only  in  part  because 
the  market  quotations  did  not  run  through  the  period  cov- 
ered by  our  table.    In  1914  the  rate  on  new  issues  of  the 


172  CREDIT 

Kansas  City  Southern  was  5.3%;  using  the  market  quo- 
tations it  was  4.8%.  We  are  unable  to  secure  the  yield 
on  the  market  quotations  of  the  Trinity  &  Brazos  Valley 
because  the  market  did  not  run  through  the  period  cov- 
ered. The  yield  on  the  Illinois  Central  using  market  quo- 
tations, was  4.5%.  Using  new  issues  it  was  4.5%,  4.7% 
and  5.1%.  On  the  Chicago  &  Alton  the  yield  on  a  general 
mortgage  issue  of  $3,500,000  was  6.3%  while  the  yield 
using  market  quotations  was  5.4%,  showing  a  very  large 
variation  which  will  be  found  to  be  generally  true  of  the 
weaker  lines  financially. 

The  real  estate  note  of  the  Chicago  &  Alton  for  $17,000 
was  5.0%  which  approximates  the  farm  mortgage  rate 
rather  than  the  credit  of  the  company.  These  are  the 
only  railroads  other  than  in  the  Western  and  Southwest- 
ern group  covered  by  both  exhibits. 

It  is  our  conclusion,  and  we  believe  the  Commission 
should  so  find  it,  that  on  representative  railroads  in  this 
territory,  the  current  market  quotations  of  outstanding 
issues  is  a  fairly  accurate  index  of  the  credit  of  a  com- 
pany; that  the*  yield  disclosed  by  the  said  market  quota- 
tions very  closely  approximates  the  yield  on  new  issues 
of  securities  by  the  same  carriers.  Further,  that  the  mar- 
gin between  the  yields  on  new  issues  and  that  on  outstand- 
ing securities,  as  evidenced  by  current  quotations,  is  very 
much  greater  on  the  smaller,  weaker  classes  of  railroads 
than  the  representative  stronger  roads,  which  handle  the 
bulk  of  the  traffic. 

We  have  been  unable  to  secure  any  representative  list 
of  new  issues  of  short  term  obligations  for  these  Western 
railroads.  The  table  submitted  to  us  by  the  carriers  in 
which  they  attempted  to  give  the  new  issues,  fails  to  show 
the  net  proceeds  on  any  short  term  obligations;  that  is 
bonds  or  notes  maturing  in  ten  years  or  less  for  any  rail- 
roads in  the  Northwestern  territory  in  the  year  1914, 
with  only  three  exceptions — Chicago  &  North  Western, 


CREDIT  173 

Minneapolis,  St.  Paul  &  Sault  Ste.  Marie,  and  Minneap- 
olis &  St.  Louis.  We  have  formerly  discussed  the  unrep- 
resentative character  of  the  Minneapolis  &  St.  Louis.  The 
Equipment  Trust  series  of  the  North  Western  show  a 
yield  of  5.5%,  but  on  the  Soo  Railroad  this  is  5.1%.  Pass- 
ing over  to  the  same  class  of  securities  of  public  utilities 
and  industrials,  we  were  able  to  secure  the  net  proceeds 
on  four  representative  companies :  Staten  Island  &  Mid- 
land showing  a  yield  of  6%;  Lake  Superior  Corporation 
showing  a  yield  of  9%;  Pacific  Coast  Co.  5.5%  and  U.  S. 
Smelting,  Refining  &  Mining  Co.  6.2%. 

In  the  year  1913  the  only  short  term  obligations  for  the 
Northwestern  railroads  furnished  us,  were  the  Chicago  & 
North  Western  Equipment  Trust  Obligations,  showing  a 
yield  of  4.7%;  Soo  Railroad  showing  yield  of  5%;  Minne- 
apolis &  St.  Louis  showing  yield  of  6%.  In  this  we  do  not 
include  convertible  bonds  for  reasons  which  are  certainly 
familiar  to  the  Commission,  they  being  not  representative 
of  the  rate  at  which  a  company  is  able  to  borrow  money. 

Turning  to  the  public  utility  and  industrial  companies, 
we  find  during  the  same  year,  the  8th  Ave.  Railroad,  New 
York,  had  to  pay  6%;  American  Bank  Note  Co.  6%;  Gen- 
eral Electric  Co.  6.5%. 

In  the  year  1912  in  this  class  of  securities  the  only  ex- 
ample given  in  the  data  furnished  by  the  carriers  was: 
Equipment  Trust  notes  of  the  Minneapolis,  St.  Paul  & 
Sault  Ste  Marie  showing  a  yield  of  5%.  Turning  now  to 
the  public  utilities  and  industrials  we  find  during  the  same 
year  the  Kings  County  Electric  Light  and  Power  Co., 
New  York,  had  to  pay  6%  (but  this  was  a  convertible  de- 
benture and  therefore  we  are  disregarding  the  same); 
General  Baking  Co.  6.8%;  Studebaker  Corporation  8%; 
Utah  Co.  6.2%. 

In  1911  the  only  short  term  obligation  shown  in  the  data 
furnished  by  the  railroads,  were  those  of  the  Iowa  Cen- 


174  CREDIT 

tral  and  Minneapolis  &  St.  Louis  which  are  not  represen- 
tative. 

In  1910  the  only  ones  shown  by  the  carriers  in  the 
Northwestern  group  are  the  Minneapolis,  St.  Paul  &  Sault 
Ste.  Marie,  the  yield  being  5.1%.  The  same  year  the 
Coney  Island  &  Brooklyn  borrowed  $500,000  at  6.7%;  the 
Lackawanna  Steel  borrowed  $10,000,000  at  7.15%;  Lehigh 
&  Wilkesbarre  Coal  Co.  secured  money  at  4.20%  (this 
issue  was  guaranteed  by  the  Central  Railroad  of  New 
Jersey). 

In  1909  the  only  short  term  obligation  shown  in  the 
Northwestern  group  of  railroads — Iowa  Central  and  Min- 
neapolis &  St.  Louis  and  Frisco,  which  as  we  have  fre- 
quently stated,  cannot  be  accepted  as  representative. 

In  the  list  of  railroads,  other  than  the  Western  and 
Southwestern,  we  find  the  Chicago  &  Alton,  St.  Louis, 
Brownsville  &  Mexican,  Wisconsin  Central,  Chicago,  In- 
diana &  Southern,  New  Orleans,  Texas  &  Mexico.  The 
only  railroad  in  this  series  that  is  concerned  at  all  in  this 
case,  and  that  is  representative  in  character,  would  be  the 
Wisconsin  Central,  and  the  yield  on  its  two  short  term 
notes  was  4%  and  4.5%,  lower  than  any  class  of  public 
utility  issued  of  a  similar  character. 

In  1908  there  are  no  short  term  obligations  shown  for 
the  Northwestern  group  of  railroads. 

SOUTHWESTERN  RAILROADS. 

The  Southwestern  railroads  show  a  higher  yield  than 
those  of  the  Northwestern  railroads. 

Using  the  current  market  quotations  on  outstanding 
issues,  we  find  the  average  yield  on  outstanding  secur- 
ities of  ten  representative  Southwestern  lines  in  1914  to 
be  5.1%.  This  list  includes  the  Santa  Fe,  Rock  Island, 
Colorado  Southern,  Kansas  City  &  Southern,  Missouri, 
Kansas   &   Texas,   Southern   Pacific,   Missouri   Pacific, 


CREDIT  175 

Frisco,  St.  Louis  Southwestern,  and  Texas  Pacific. 

Turning  to  the  industrials,  whose  quotations  between 
the  years  1900  and  1914  are  included  in  Norton  Exhibit  4, 
pages  72A,  72B,  72C  and  72D,  and  Exhibit  3,  you  will  find 
the  average  yield  on  the  manufacturing  industrial  bonds 
to  be  5.7%  (excluding  one  abnormal  yield  of  13.5%),  coal 
and  iron  bonds  5.5%  (this  excludes  the  Wilkesbarre  Coal 
Co.);  on  telephone  and  telegraph  bonds  4.9%;  on  Niag- 
ara Falls  Power  bond  4.9%,  and  miscellaneous  bonds  an 
average  of  6.3%. 

The  average  yield  on  the  Southwestern  railroads  is 
lower  than  the  yield  on  25  out  of  the  36  industrial  bonds. 
It  is  also  lower  than  all  of  the  bonds  consolidated.  The 
average  yield  on  industrials  being  5.9%  and  on  the  South- 
western railroads  5.1%.  We  find  the  average  yield  on 
the  utilities  shown  on  pages  72-A  and  72-B  of  Norton 
Volume  1  to  be  exactly  the  same  as  the  average  for  the 
Southwestern  railroads. 

In  1913  the  average  yield  of  the  Southwestern  rail- 
roads was  5%;  on  the  industrials  the  same  year  it  was 
5.7%.  On  the  public  utilities  it  was  5.1%.  In  1912  on 
the  Southwestern  railroads  the  yield  was  4.7%;  on  the 
industrials  5.3%  and  utilities  5%.  There  were  a  large 
number  of  utilities  below  the  Southwestern  as  well  as 
above. 

New  issues  in  1914.  The  only  issues  reported  to  us  by 
the  Southwestern  lines  were  those  of  the  Denver  &  Rio 
Grande,  Kansas  City  Southern,  the  Frisco  and  the  Trin- 
ity &  Brazos  Valley.  We  cannot  accept  the  Frisco  as 
representative.  The  yield  on  that  was  13.1%.  Its  un- 
savory financial  record  is  familiar  to  the  Commission. 
It  is  common  knowledge.  The  securities  of  the  other 
three  railroads  show  an  average  yield  of  5.3%. 

Turning  to  the  public  utilities,  we  find  the  average  on 
those  four  Southwestern  securities  have   a  better   rate 


176  CREDIT 

than  the  Consolidated  Gas.  Co.  in  New  York  City,  Hud- 
son &  Manhattan  Railroad  Co.,  Interborough  Rapid  Tran- 
sit Co.  and  New  York  Railways.  The  average  on  public 
utilities  as  shown  in  the  exhibit  is  less  than  the  South- 
western railroads.  Amongst  the  industrials  we  find  the 
Illinois  Steel  Co.  had  to  pay  more  for  its  money  than  the 
Southwestern  railroads,  while  the  Duluth,  Missabe  & 
Northern,  Indiana  Steel  and  Euclid  Equipment  Trust 
bonds  commanded  a  better  rate  than  those  of  the  South- 
western railroads. 

In  1913  the  average  yield  for  the  new  issues  of  the 
Southwestern  railroads  was  6.2%,  which  is  the  weighted 
average.  This  high  yield  was  due  principally  to  the  Fris- 
co. If  you  exclude  the  Frisco  the  arithmetical  average 
of  the  yields  will  be  5.4%.  This  was  a  better  rate  than 
had  to  be  paid  by  the  following  public  utilities  in  New 
York  City  and  Massachusetts:  Bronx  Gas  &  Elec.  Co., 
Interborough  Rapid  Transit  Co.,  Boston-Worcester 
Street  Ry.  and  Boston  &  Northern  St.  Ry.  Co.  Other 
utilities  were  able  to  borrow  their  money  at  a  better  rate. 
The  industrials  which  we  were  able  to  secure  show  the 
following:  American  Bank  Note  Co.  had  to  pay  6%, 
General  Elec.  Co.  had  to  pay  6y2%.  In  1912  the  South- 
western railroads  paid  5.4%  for  their  new  money  on  an 
average.  At  this  time  they  were  not  embarrassed  by  the 
insolvency  of  the  Frisco.  "We  find  the  following  public 
utilities  had  to  pay  more  for  their  money  than  the  South- 
western railroads:  Brooklyn  Borough  Gas  Co.,  New 
York  and  North  Shore  Traction  Co.,  New  York  Rys. 

Amongst  the  industrials  as  having  paid  more  than 
these  Southwestern  lines,  were  the  Republic  Iron  &  Steel 
Co.  Other  utilities  and  industrials  secured  their  money 
at  a  better  rate  than  the  Southwestern  lines. 

These  facts  would  seem  to  demonstrate,  quite  conclu- 
sively, that  railway  credit  is  better  than  that  of  any  class 
of  companies  engaged  in  any  other  line  of  industry. 


CREDIT  177 

STOCK  PRICES. 

In  this  same  way  we  have  compiled  the  stock  prices  on 
all  industries  whose  securities  were  quoted  in  the  same 
publication — the  Financial  Chronicle — and  published 
continuously  between  1890  to  1914,  inclusive.  This,  of 
course,  includes  the  strongest  and  best  classes  of  indus- 
trials, they  being  the  American  Cotton  Oil  Company, 
American  Sugar  Kefining  Company,  American  Telegraph 
and  Cable,  Consolidated  Gas  Company,  New  York,  La 
Clede  Gas  of  St.  Louis,  Pacific  Mail  and  Steamship  Com- 
pany and  the  Western  Union  Telegraph  Company.  In 
addition  to  these  industrials,  we  have  a  list  of  five  of  the 
strongest  mining  companies  in  the  United  States :  Amer- 
ican Coal  Company,  Consolidated  Coal  Company,  Home- 
stake  Mining  Company,  Ontario  Mining  Company,  and 
Quick  Silver  Mining  Company. 

From  1890  to  1899  the  average  price  on  the  North 
Western  Railroad  stocks  was  less  than  the  price  on  the 
industrials, .  excluding  the  mining  stocks. 

Ever  since  the  year  1899,  for  each  year,  the  railroads 
averaged  more  than  either  of  the  industrials,  excluding 
mining,  or  the  industrials  including  the  mining  stocks. 
Norton  Exhibit  4,  page  123.  This  is  graphically  shown 
on  the  accompanying  chart  "Y."  (tr.  178.)  (Mr.  Nor- 
ton's term,  "Western  railroads,"  is  synonymous  to  the 
use  of  the  expression  Northwestern  Group  by  witnesses 
Chambers,  Powell  and  Ellis.) 

The  Bureau  of  Labor  of  the  Department  of  Commerce 
and  Labor  has  computed  the  relative  prices  of  about  two 
hundred  standard  commodities  at  wholesale  in  the  United 
States  during  the  past  twenty  years.  These  are  fully  de- 
scribed in  the  records  of  the  Bureau  of  Labor.  Mr.  Nor- 
ton has  compiled  a  series  of  index  numbers  on  commod- 
ity prices  adopting  a  somewhat  different  method,  which 


178 


CREDIT 


i 

1 
j 

I 

/ 

1 

i 

5 

» 

f 

/ 

| 

/ 

\ 

1 

| 

y 

/ 

j 

5 

£ 

<v 

f   1 

1 

8 

°&   lii 

Sit  H 

.iro  >  \t 

kjO 
Q! 

5 

*\ 

1 

\ 
i 

i 

i 

o 

^ 

j 

1 
i 

/ .( 

i 

0 

r 

^ 

/ 

/ 

3 

V 

s. 

( 

/  ■ 

V 

\ 

\ 

\ 

t 

) 

) 

1 

< 

r 

{ 

N 

e 
B 

'V 

■>, 

i 

\ 

\ 

0 

s 

0 

1 

01 

1 

1 

■ 

\N 

\ 

\\ 

Is 

5 

\ 

\ 

{ 

i 

| 

5 

1   y 

) 

5. 

1 

/ 

i 

V 

5 

( 

( 

q 

\    \ 

\ 

« 
$ 

\ 

\ 

£ 
% 

t 

i 

i 

! 

! 

Q 

1 

CHART  Y. 


CREDIT  179 

is  described  in  the  record.     There  is  no  substantial  dif- 
ference in  the  trend  of  prices  in  either  group. 

For  the  purpose  of  comparing  the  trend  of  prices  over 
a  period  of  years,  we  have  used  the  same  method  and 
compiled  index  numbers  for  the  market  prices  of  the 
railroad  and  industrial  stocks.  The  series  of  index  num- 
bers cover  a  period  from  1890  to  1914  inclusive.  The 
phenomenal  increase  in  market  prices  of  railroad  stocks 
in  1900  is  illustrated  by  this  chart  which  is  shown  in  Nor- 
ton's Exhibit  No.  3,  page  123.  The  use  of  relative  figures 
serves  to  exaggerate  the  situation.  It  serves  the  same  pur- 
pose statistically  as  the  microscope  does  for  the  botanist. 
However,  it  very  fairly  develops  the  tendency.  Over  a 
long  period  of  time  it  is  very  instructive.  We  find  that 
market  prices  on  commodities  have  risen  from  1890  to 
1914,  but  the  market  prices  of  railroad  stocks  have  gone 
up  more  than  market  prices  of  commodities,  or  the 
market  prices  of  industrial  stocks.  During  the  period  of 
1906  and  1907  railroad  prosperity  was  notoriously  great ; 
and  yet  we  see  a  great  decline  in  the  relative  prices  of 
railroad  stocks  during  that  time.  Mr.  Norton  explained 
that  by  citing  the  large  stock  allotments  made  by  rail- 
roads those  years.  For  instance,  the  Great  Northern 
made  an  allotment  of  ore  trust  certificates  amounting  to 
100%.  These  rights  sold  on  the  market  at  $78.00  per 
share.  This  was  equivalent  to  a  stock  dividend.  In  1906 
and  1907  the  Chicago  North  Western  made  a  stock  allot- 
ment of  45%.  These  rights  sold  on  the  market  at  $35  per 
share.  The  Chicago,  Milwaukee  &  St.  Paul  in  1906,  made 
a  stock  allotment  at  par,  when  their  stocks  were  selling 
at  $1.76.  These  rights  sold  on  the  market  at  $33.50  and 
$55,007,  respectively,  for  two  allotments.  The  Great 
Northern  also  made  a  stock  allotment  of  40% 
in  1907,  aggregating  sixty  million  dollars.  The  Northern 
Pacific  in  1907  made  a  stock  allotment  of  60%,  at  par, 
aggregating  93  million  dollars.  The  market  value  of 
these  rights  was  $20.00  a  share.    These  enormous  dissipa- 


180 


CREDIT 


tions  of  assets  and  securities  explain  the  drop  in  the 
line  in  1906-1907,  when  they  were  at  the  height  of  their 
prosperity;  the  drop  coming  before  the  panic  of  the 
following  year. 

The  accompanying  chart  "X"  shows  the  prices  on  the 
Southwestern  railroad  stocks,  compared  with  industrials. 
The  Southwestern  stocks  are  lower. 


1  t 

t 

/ 

8 

/ 

! 

5 

{  ! 

f 

1 

1    ! 

x 

i    i 
1 

! 

0. 

1 

CI 

/    , 

1 

0\ 

■ 

t   ( 

1 

c? 

■ 

2 

O      III 

> 

) 

)/ 

I 

/ 

B  III 

> 

/ 

o 

<j*) 

* 

/ 

f 

/ 

O 

■ 

!£r£ 
"Si* 

i 

( 

| 

£ 

\ 

\ 

I 

\ 

i 

I 

/ 

l 

( 

1 

5 

\ 

\ 

1 

si 

\ 

\ 

i 

) 

1 

\ 

I 

1 

■ 

\ 

's     * 

C 

i 

1     ' 

^ 
* 

\ 

\ 

\ 

\    <* 

n 

\ 

i  \ 

; 

Li 

)  5 

1 

!■! 

J 

Si 

■ 

/  2 

1 

1   | 

/ 

/ 

/ 

{ 

\ 

/ 

| 

) 

$ 

i 

3 

/ 

» 

1 

\ 

| 

! 

1 

i 

1 

C 

CHART  X. 


CREDIT  181 

We  have  brought  down  to  date  the  market  prices  on 
securities  that  are  covered  by  the  current  issues  of  the 
Wall  Street  Journal.  They  have  compiled  average  prices 
on  twenty  representative  railroads  and  twelve  represen- 
tative industries  during  the  past  seventeen  years.  We 
have  platted  these  on  a  chart  shown  in  Mr.  Norton 's  Ex- 
hibit 3  at  page  125. 

This  shows  that  in  1896  to  1900  the  railroad  and  indus- 
trial stocks  were  close  to  each  other.  They  approached 
each  other  again  in  1907.  They  are  closer  again  in  1914, 
although  the  railroads  exceeded  the  industrials  in  1914 
more  than  they  did  in  1907  or  in  1896  to  1899.  The  re- 
markable fact  shown  by  this  table,  as  has  been  previously 
called  to  the  attention  of  this  Commission,  is  that  the 
average  price  of  representative  railroad  stock  has  ex- 
ceeded the  average  price  of  the  representative  industrial 
stock  for  every  month  of  every  year  from  1896  down  to 
the  present  time. 

These  facts  about  the  bonds  and  stocks  of  Northwest- 
ern and  Southwestern  railroads  reflect  the  common  judg- 
ment of  the  investors  of  the  nation  upon  the  desirability 
of  their  securities,  whether  they  are  attractive  or  not. 
This  judgment  is  not  expressed  by  an  interested  witness 
in  a  law  suit,  by  the  railroad  president  or  shipper,  but  in 
a  far  different  and  more  effective  manner ;  it  is  expressed 
by  the  action  of  men  who  go  into  their  pockets  and  back 
up  their  judgment  with  hard  cash,  piling  it  up  into  sums 
aggregating  hundreds  of  millions  of  dollars  annually. 
In  hard,  unyielding,  conclusive  terms  these  men  have 
said  in  the  market  places  of  the  country  that  the 
securities  of  the  Northwestern  group  of  railroads,  as  a 
class,  are  more  desirable  than  the  securities  of  other 
public  service,  industrial  and  manufacturing  companies, 
and  that  the  securities  of  the  Southwestern  railroads 
have  been  making  very  substantial  progress. 


182  CREDIT 

What  better  judge  can  you  ask  as  to  whether  these 
railroad  securities  are  attractive  or  not,  than  the  investor 
himself  ?  The  price  at  any  given  moment  on  a  particular 
thing  may  be  fixed  by  the  speculator.  He  is  trying  to 
guess  what  the  permanent  investor  is  about  to  do.  But 
the  range  of  prices  over  a  long  period  of  time  on  a 
representative  list  of  securities  is  fixed  by  the  judgment 
of  the  investor.  In  clear,  unmistakeable  language  the 
investors  of  the  United  States  have  testified  that  rail- 
roading in  the  Northwestern  part  of  the  United  States 
is  more  profitable  than  any  other  line  of  business  of  a 
well  established  character,  in  the  country.  These  North- 
western bonds  sell  on  the  market  at  higher  figures  than 
the  bonds  of  a  like  character  carrying  a  like  rate,  of  other 
public  service  and  industrial  companies.  The  credit  of 
our  Northwestern  railroad  companies,  as  a  whole,  ranks 
far  better  than  those  companies  engaged  in  street  rail- 
way, gas,  electric  light,  telegraph,  telephone,  manufac- 
turing and  industrial  pursuits.  The  proper  place  to  go 
to  find  out  whether  these  investments  are  desirable  is 
to  go  where  the  keenest  and  shrewdest  representatives  of 
the  country  are  engaged  in  making  investments.  There 
we  find  these  securities,  as  a  class,  are  more  desirable 
and  command  higher  prices  than  those  of  any  other 
class  of  securities  on  the  market,  outside  of  Govern- 
ment bonds.  While  the  Southwestern  railroads  do  not 
rank  so  high,  yet  we  find  they  have  been  getting  on  a 
more  solid  and  substantial  basis  than  in  former  years. 


III. 

THE  NET  REVENUES  OF  THESE  CARRIERS  ARE  ADEQUATE,  AS 
PROVED  IN  THIS  CASE,  AND  JUDGED  BY  THE  STANDARDS 
WHICH  HAVE  BEEN  ESTABLISHED  IN  THE  PAST  BY  THE 
UNANIMOUS  ACTION  OF  THIS  COMMISSION. 

TENDENCIES  OF  EARNINGS. 

The  records  of  the  market  place  we  have  been  consid- 
ering, reflect  other  facts,  which  are  easily  ascertained 
from  the  reports  of  the  Commission,  and  of  the  various 
railway  companies  to  their  stockholders.  Credit  is  a 
sort  of  corollary  of,  and  dependent  upon  profits.  If  a 
company's  credit  is  good  that  is  generally  because  0  its 
profits,  both  present  and  prospective,  are  good. 

If  we  were  permitted  to  choose  the  companies  we  could 
prove  that  any  industry  in  this  country  was  unprofitable. 
Failures  are  everywhere.  We  are  more  concerned  with 
representative  companies,  which  handle  the  bulk  of  the 
business.  The  average  company  in  the  oil  business  dur- 
ing the  past  twenty  years  has  been  a  failure,  but  the  oil 
industry  has  been  profitable.  The  standard  adopted  by 
Mr.  McCrea,  former  president  of  the  Pennsylvania  Rail- 
road company  in  1910,  is  the  proper  one — the  properly 
managed,  properly  capitalized  company,  operating  where 
properly  needed.  For  the  purpose  of  observing  the  ten- 
dency of  freight  traffic  conditions  in  Western  territory 
we  will  select  the  two  representative  companies  which 
Mr.  Commissioner  Lane  stated  were  typical  in  the  1910 
case — Chicago,  Burlington  &  Quincy,  and  Atchison,  To- 
peka  &  Santa  Fe.  We  will  add  to  these  the  Chicago  & 
North  Western,  a  company  that  has  taken  such  a  leading 


184  EARNINGS 

part  in  the  present  proceedings ;  a  company  over  90%  of 
whose  mileage  is  in  the  territory  directly  involved  in  this 
case. 

It  will  become  more  apparent  as  we  proceed,  that  the 
variations  in  rules  of  accounting,  the  differences  in  traf- 
fic conditions,  etc.,  etc.,  necessitate  the  analysis  of  one  or 
more  given  companies,  themselves,  in  order  to  reach  any 
intelligent  conception  as  to  the  value  of  consolidated  fig- 
ures for  any  particular  territory. 

The  only  other  occasion  when  the  adequacy  of  western 
freight  rates  has  been  determined  by  this  body  in  the 
history  of  these  railroads,  was  in  the  decision  rendered 
February  22, 1911,  in  the  proceeding  known  as  the  West- 
ern Advance  Rate  Case.  In  a  mastery  discussion  of  prin- 
ciples contained  in  that  decision,  doctrines  were  an- 
nounced that  will  be  quoted  and  requoted,  in  decisions  of 
commissions  and  courts  for  many  years  to  come.  Mr. 
Lane  did  not  adopt  a  fixed  formula.  The  Commission 
considered  the  trend  of  earnings  over  an  extended  period 
of  time,  and  largely  based  its  conclusions  upon  that  show- 
ing. 

In  1890  the  application  of  a  7y2%  return  as  the  mini- 
mum on  outstanding  capital  stock,  would  have  resulted  in 
an  advance  in  freight  rates  adequate  to  make  an  increase 
of  65%  in  their  net  corporate  income.  Instead  of  increas- 
ing their  rates,  they  decreased  them.  The  carriers  have 
not  suffered.    They  have  grown  enormously. 

In  1895,  close  to  the  panic,  we  find  the  rate  of  return 
on  book  value  of  the  properties  in  the  Northwestern  group 
at  the  lowest  ebb  since  1890;  the  lowest  it  had  been  for 
six  years.  Now  if  an  application  by  the  carriers  had 
been  made  for  an  advance,  and  the  tendency  theory,  so 
strongly  and  urgently  advocated  by  the  carriers  in  this 
proceeding,  had  been  adopted,  we  would  have  had  a  gen- 
eral advance  in  freight  rates ;  but  it  was  not  necessary  and 


EARNINGS  185 

the  carriers  have  grown  and  prospered  more  since  then, 
than  ever  before.  The  tendency  for  a  short  period,  five 
or  six  years,  is  as  unsafe  a  test  as  any  that  can  possibly 
be  conceived.  Had  that  test  been  invoked  in  1908,  we 
would  again  have  had  a  general  advance.  The  average 
rate  on  book  value  at  that  time  was  at  the  lowest  ebb  it 
had  reached  in  the  Northwestern  group  of  railroads  for 
seven  years.  No  general  advance  was  permitted.  Their 
net  income  has  increased  $30,000,000  since  1908. 

RETURN  ON  BOOK  VALUE. 

It  is  commonly  known  that  the  rates  on  money  were 
higher  in  the  early  90 's  than  they  are  today.  If  7%  had 
been  urged  as  a  proper  return  on  book  value  in  1890  and 
as  a  justification  for  an  advance  in  freight  rates,  con- 
sider what  would  have  happened.  In  the  Northwestern 
group  of  railroads  you  would  have  authorized  an  increase 
in  net  operating  income  of  one-half  the  return  at  that 
time,  or  $26,000,000,  whereas  during  the  next  ten  years 
there  was  an  actual  decline  of  25%  in  their  freight  rates. 
That  has  remained  true  to  the  present  time  with  slight  in- 
creases in  the  country  as  a  whole.  That  lower  plane  of 
freight  rates  in  this  countryhas  earned vastlymore  for  the 
stockholders  owning  their  railroads,  than  the  higher  plane 
existing  in  1890.  The  stockholder  in  the  Northwestern 
group  of  railroads  is  earning  practically  twice  as  much 
on  his  stock  today  as  he  did  then.  It  would  be  a  piece 
of  gross  folly  and  unpardonable  injustice  to  the  Amer- 
ican public  to  have  inflicted  such  a  burden  upon  them ;  and 
yet  that  argument,  if  true,  would  have  justified  an  ad- 
vance of  that  character  at  that  time.  Without  any  in- 
crease in  rates,  we  find  a  steady  upward  sweep  in  net  rev- 
enues from  $52,000,000  to  $87,000,000  in  1900,  and  then 
increasing  practically  another  100%  in  1914,  accompanied 
by  regular  increases  of  even  a  greater  amount,  to  the  car- 
riers themselves. 


186  EARNINGS 

A  4%  or  a  5%  return  on  book  value  proves  nothing,  un- 
til you  know  what  that  book  value  is.  You  yourselves 
have  unanimously  discredited  that  as  any  factor  worthy 
of  confidence. 

After  all  things  are  considered,  taking  a  broad  per- 
spective over  an  extended  period  of  years  is  the  safer, 
wiser  course  than  the  adoption  of  any  fixed  percentage, 
or  rule  of  thumb,  at  any  given  time.  Under  the  existing 
level  of  rates  more  than  half  of  the  railroad  property  in 
this  territory  has  been  constructed.  Bonds  of  these  com- 
panies are  more  attractive  than  those  of  companies  en- 
gaged in  any  other  line  of  business  in  the  United  States, 
and  their  stocks  are  earning  over  8%  as  a  whole,  includ- 
ing the  weak  lines  and  the  poor  lines.  These  rates  have 
been  adequate  to  produce  this  result,  and  yet  the  applica- 
tion of  any  of  the  other  tests  that  have  been  suggested 
would  have  cost  the  consuming  and  shipping  public  hun- 
dreds of  millions  of  dollars  during  the  past  twenty-five 
years.  A  well-balanced  analysis  of  the  trend  of  affairs 
over  an  extended  period  of  time,  with  full  recognition  of 
the  basic  principles  that  are  involved,  is  probably  the 
wisest  course  to  pursue. 

INCREASE  IN  EARNINGS  AND  DENSITY  OF  TRAFFIC. 

It  is  unfair  to  take  any  period  of  three  or  four  months, 
or  years,  as  typical  of  the  general  tendency  in  any  indus- 
try. With  such  an  absurd  method  as  that,  at  several 
times  since  this  Commission  has  been  keeping  records, 
you  could  prove  most  of  the  railroads  in  the  country  were 
rapidly  growing  toward  bankruptcy ;  then  at  another  time 
you  could  prove  that  they  would  ultimately  absorb  all  the 
wealth  of  the  world.  The  general  trend  over  a  series  of 
years  is  the  only  safe  indication  of  tendencies. 

The  accompanying  table  presents  the  consolidated  fig- 
ures for  the  entire  Western  District,  as  classified  by  the 
Interstate  Commerce  Commission: 


EARNINGS 


187 


* 


Ps» 
C  9 

4)  X 
>c8 


:  — 


cet-t-oc 

00t-rH©t 

O  CO  OU3  C 

t-iniHi-le 
©©•«>mc 


O  CO©» 

OS  ot-« 

©  CCOCL 

00  rHOO 

t-  cocm 

in  lam 

i-T  inirc 


t-HC 


COCOt- 

t-TH 

©t-N 

©OOt-t 

rHooce- 
o"oot~ 

ncocc 

CM  CM.  CM 


LSIO 

ISO 


©-a" 
t-t- 
CMCM 


OOCM'O't-t- 

co©oom© 
cq©ooocM 
t-^coincoin 
ooocot-in 

in©i-t©in 


Ml       ©**■■ 


NOSLOlHOS 

oowen 
r-i  to  t-  ©_i~ 

•*»*  in  Hb-  OS 
»H«Nf 

rHt-^T-Tcet- 

OOtONtCN 
CO  CO  CO  COM 


1  '-rt 

fcl  >  L 

5    • 


* 


* 


^ 


4>  0.-C 


US"*!- OS  OS 

intMi-icMoo 
cotMCOcci-i 
co'W^oTcm 

ccoiact- 

rtCMlft- 


00  CM-*  CO  CO 
00»-IC0mi-l 
CQ  CO  CO  CO  CO 


CXONNM 
tCOMiRN 
001AHO00 

©osincot— 

H019H03 
t-  00  OS  m  to 


ONHlOt- 
CO  COCO  CO  CO 


i-lint-inCO 
N«Ot-M 
NrtOMO 

t-Tt-in^i*© 

ONH00H 

©c-^cmoo 


^,  ■flioOMO 
CO  HU3  0S»» 
CO        T)<  tT  ■*  lO  lO 


cot-e 

CNIOC  C 

<eoi 

OStO 
00  to 

cot- 


t-t-t- 

©into 


Or- 
eo CO 


t-t- 00 
t-tOin 

r-t-t- 


©  in  i-i  oo  m 
t-  i-l  -n"  CO  oo 

t^OO^C-CO 

•««  in  -u"  t-  to 

00  OS  00  t- 00 


i-tOOCOOOCO 
OOiHCOt-00 

oo  oo  oo  oo  oo 


BJ  IB 


St." 

4)  »" 

I-  >  u 

«OcS 


# 


* 


# 


■s, 

■s 

10  2 

o  c 

-  4) 
w  4) 


i-l  r-l-*  OS  00 

CO 

co  in  coco  in 

,_, 

■<»<  oo  •*  o  oo 

OS 

i-i  os  cot- co 

1- 

CM  ""J"  CO  ©  "C» 

*OMH» 

CO 

to  00  00  CO  CO 

to 

C.1.1NKM 

cot-cMi-i© 

m 

incoo©t- 

«vnNO 

CO 

*<r  co  to  oo  os 

CXI 

THOONUSOS 

w 

uOC'^O^1 

H 

oothoco-* 

©T-IOOCOtO 

CQOOOO^OS 

o 

OOOl^t- 

CM 

eoeq«o 

co 

iH^tomco 

C»CMO 

t-KNt-00 

o 

OrHOOTfCO 

o 

t-t-ca©'* 

to 

cooocoo-w 

NOOtCHt- 

1-1 

'.  i  :'-[--- — 

!-t 

1-1  toot- OS 

m 

:i  •-    —  i-  -  l 

CO 

mosmosco 

cooooooos 

CM 

oo  to  OS  CO  t- 

p4 

inosooWce 

CM 

to©°VTos"-<»< 

CO 

co  in  in  •*•  i-h 

eoTTOsoeo 

■ 

MCOincOCC 

a 

cooointMin 

in 

OlH  tot- 1-1 

m 

«einin^ri-i 

^r  u*  ij*  i-^  ^ 

<^ 

•*< 

4* 

to  tot-  00  00 
•fr 

©OrHOiH 
l-Tl-TlHr-T 
•» 

CMlHlHCOtM 

iHl-Hl-TlHl-r 

Ot-INCO'C" 
os  os  os  os  os 
00  00  OO  00  00 


into  t- oo© 

©OS©  ©OS 


WWWUUUU  J.     '       J      J       J 

iHT-lrHrllH        •<<        iHrHiHTHrH 


©ihcmco-w 
oo©©© 

OS  ©  OS  ©  © 


in  cot-  oo© 
eoooc 

OS  ©  OS  ©  © 


Oi-ICMCOTT  rt) 

rHl-llHi-liH  Z 

©©©©©  j 

rtHHHH  << 


188  EARNINGS 

The  credibility  to  be  attached  to  the  railroad  com- 
plaints so  constantly  made  about  the  disastrous  effects 
of  regulation,  can  be  tested  by  a  consideration  of  the 
accompanying  table  so  far  as  such  criticisms  are  just  with 
reference  to  Western  railroads.  There  have  been  failures 
in  the  railroad  business,  as  in  all  other  industries ;  but  we 
must  consider  the  situation  as  a  whole. 

The  Commission  commenced  operations  about  1888,  but 
the  accounts  did  not  reach  stable  form  until  1890,  so  we 
have  in  the  accompanying  table  a  comprehensive  review 
of  just  what  the  existence  of  the  Interstate  Commerce 
Commission  and  State  and  Federal  regulation  has  meant 
to  our  Western  railroads. 

There  is  always  an  ebb  and  flow  in  the  railroad  business, 
as  well  as  in  all  other  industries.  It  will  be  noted  from 
the  foregoing  table  that  at  times  the  net  revenues  declined 
for  a  period  of  years,  after  which  they  recovered.  For 
instance,  in  1912  they  were  less  than  for  any  of  the  three 
preceding  years,  but  the  following  year  they  were  greater 
than  in  any  preceding  year  since  1890,  excepting  only  1910 
and  1907. 

The  net  revenues  as  a  whole  of  these  Western  railroads 
in  1914  during  the  year  of  depression  was  $100,000,000 
greater  than  in  1900,  and  it  exceeded  the  net  revenues  of 
1890  by  almost  $200,000,000. 

In  the  entire  territory  between  the  Mississippi  River 
and  the  Pacific  Coast,  the  following  railroads  earned  from 
6  to  78%  on  all  their  capital  stock  outstanding  in  the 
hands  of  the  public. 

Chicago,  Burlington  &  Quincy earn  16.  % 


Chicago,  Milwaukee  &  St.  Paul 
Atchison,  Topeka  &  Santa  Fe . . 

Southern  Pacific 

Chicago  &  North  Western 
Great  Northern   


6.7% 
6.5% 
14.8% 
8.1% 
8.3% 


EARNINGS 


189 


Union  Pacific 

St.  Louis,  Iron  Mountain  &  Southern. . 
Minneapolis,  St.  Paul  &  Sault  Ste.  Marie 

Northern  Pacific 

Oregon  Short  Line 

El  Paso  &  Southwestern 

Duluth,  Missabe  &  Northern 

Duluth  &  Iron  Range 

Louisiana  Western   

Bingham  &  Garfield  

Butte,  Anaconda  &  Pacific  

Florence  &  Cripple  Creek 

Arizona  &  New  Mexico 

Chicago,  St.  Paul,  Minneapolis  &  Omaha 
Nevada  Northern 


10.4% 

6.4% 

7.5% 

8.0% 

9.7% 

8.0% 

56.7% 

78.0% 

14.3% 

44.7% 

11.8% 

10.2% 

11.9% 

6.8% 

35.9% 


These  companies,  earning  from  6  to  78%  handle  75% 
of  the  traffic  between  the  Mississippi  River  and  the  Pacific 
Coast.  The  roads  serving  this  entire  Western  territory 
from  the  Mississippi  River  west,  as  a  whole,  had  a  total 
net  corporate  income  amounting  to  over  6.24%  on  all  their 
capital  stock.  This  includes  the  rich  roads  and  the  poor 
roads,  the  weak  and  the  strong,  and  includes  the  capital 
stock  of  all  such  roads  as  the  Chicago  &  Alton,  Missouri 
Pacific,  Missouri,  Kansas  &  Texas,  Northern  Pacific,  etc. 

There  is  a  great  deal  of  water  in  this  stock.  Much  of  it 
was  given  away  as  a  bonus,  and  never  did  represent  any 
substantial  investment.  The  average  rate  earned  in  this 
stock  for  the  last  year  officially  reported,  1913,  was  double 
what  it  was  sixteen  years  ago  and  five  times  as  great  as  it 
was  twenty-five  years  ago. 


190 


EARNINGS 


©  ©" 

«-  >  i. 


S.  >  fc, 

5    £ 


•OS 

^«-  e 

Ch 

O 


©©^ 

u  >  v. 

C        © 


M  3 

a 

d 
O 


^ 


i-h  oooco 

os  -«r  o  ■»  so 

eo  eo  eo  eo  13 

O  19  00133 

13  13  O  CO  U3 


•  isoats  I  us     ^oceoooco 

•  ososeooo     rr     iaxt-»M 

lHl-il-il-i©     I  r-5  '©OCON        1-J        CO  CO  T»- t' V 


^•UJOl-13 


5CC-  T  CO 


£ 


■>9<  TPOOOSO 

t-  ^Ot-N 

©  13  eo  io  eo 

OS  HHt-O 


■<r-<i«eoeo© 

*Ht-NO 
CO  00  00  CO  iH 

o 

OS 

COiHOS<Hin 
COi-lt-COCO 
00  CO  00  CO  CO 

OS 
1-1 
id 

*C30Nl3 

co  eo  co  coo 

1-H -»  ■*•  CO  CO 

1-1 
eo 

CO 

■fl-COSO©-*1 
OrtCOHt- 
CM  CO  CO  00  CO 

eo 

t- 
co 

OSCO—li-l 

t— t-c-co 

coo  C-  OS 

coso—it-'* 

1000*1- 

OS 
CO 

OMt-lfirl 
O0S1>00  00 
(Ct-Ot-O 

CO 

o 

00  13  CM  CO  ■** 
CM  i-i  t-  CM  t- 

©OSOOCOCO 

CO 
CO 
00 

1>  30*13  CO 

©cooost- 

t- CO  CO  CO  CO 

OS 
OS 

co©*  — 1 

OS  t—  CO  CM 

OO  CO  CO  CO 

SO  Sols'*  CO 

coco  coco 

co 

CO 

eo  eon*  sot- 
so  eococ- 

co 

$103 
113 
141 
143 
136 

CO 

I-I 

OOrHOSOOOO 
i3©iSCO« 
i-ieOSOCOSO 

CO 

M 

Vt 

-r  co  coo 

00  00  OS  13 
CMCOriCO 

* 


£ 


CO  00  CO  CM  CO 

t-t-ooo 

■*  cot- CO  00 

CO 
13 

o 

oosoooco 

CO  00  •*  CO  CO 
OS  OS  Tf  coo 

CI 

rH 

co 

iH  t-i-ICOCO 
OS  CO  CO  O  OS 

oo©oost- 

CJ 
CO 

OO1HCO1H13 

cotr-oooco 

CMCOCOOCO 

N 
t- 

co 

OS  CO  13  OS 
ococoso 

SO  COir  CO 

co-*  ost-os 

OS  t--*  CO  CO 

i-hoococoos 

OS 

0) 

OS 

^•coiaoot- 

OCMCO-*OS 
CO  CO  SO  00  CO 

CO 

o 
m 

CSI0013T 

©t-cocooo 

13  CM  t— COCO 

«o 

13 

O 

osoooiaoo 

13  CM  ■* —130 

oo  "•*  o  •*  t- 

CO 

o 
—1 

co  so  eo  os 
osso©* 

00  CO  13* 

l-CSOHM 
.-::  —  —   r 
i-l  — 1  CM  CM  CO 

CO 
CM 

CM  CM  CM  CO  CO 

COOrHCMOS 

CO  13  CO  CO  CO 

CO 

to 

US 

CM  CO  00  t- CO 

iHCOOCOCO 
OSOSOOrH 

iH 
© 

00  SO  [-13  CD 
t—  iH  i-l  COO 
eo*C-t— © 

CO 

CO 

iHOOiHt- 

eocoeoi-i 

CMOr-IO 

CMeMCoTcMCM 

CI 

cm'cmcmcmcm 

CO 

It 

eo  so  co  co  eo 

CO 
Vr 

CO  CO  CO  CO  * 

co 

vt- 

©— isoeoir 

OS  OS  OS  OS  OS 
OC  "S:  30  3C  30 


13  CO  t-  30  OS 
OS  OS  OS  OS  OS 
00  00  00  00  00 


OiHSOCO'* 

ooooo 

OS  OS  OS  OS  OS 


13  CO  t- 30  OS 

ooooo 

OS  OS  OS  OS  OS 


HHHHrt        <!        iHrHi-li-lrH 


M 
ej 

m      e. 

J.  1— I  T— 11— 1^< 

4 


©iHCOCO 

_  —  —  — 

OS  OS  OS  OS 


.2  £"3 

•*  o-r 
30© 

§«d 

lSo 

5o5 


C  x  be 

OS-© 

W«h 

M£oB 
©  © 

VI 

C3       — 
■ 

o  aj     o 


P-l'H—  c^ 

i-l  -  C3  ©       C  © 

>.2<E    °* 

-      ©      « o 

OQ  Ck  ©  S-       ••-'  © 

a    £«     cd  a 

S-  w  o  OQ        «  > 

Isto     o© 
Eg.  o     u_ 

SmsI      2  eS 

w     ad     ft3 
w ©3  w     » c 

dd?S    S= 

sa^a  Is 

3  ©  3  *  —  -r  B 

c-    wc^d  o 
_,  t--<  d3  S"-1 


os»-i  ©  w  ©  S  S 
0  -  0  d*J      -, 

j-32©2-.S 

O  a  a 


EARNINGS  191 

This  concludes  our  discussion  of  the  Western  district  as 
a  whole. 

The  Western  district,  as  classified  by  the  Interstate 
Commerce  Commission,  roughly  speaking,  extends  from 
Chicago  and  the  Mississippi  River  to  the  Pacific  Coast, 
and  from  the  southern  boundary  of  Canada  to  Mexico, 
embracing  over  three-fourths  of  the  territory  of  the 
United  States. 

These  railroads  as  a  whole  from  the  Mississippi  Valley 
to  the  Pacific  Coast  have  been  and  are  now  seeking  a  gen- 
eral increase  in  their  revenues  by  various  methods.  They 
are  decreasing  transcontinental  rates,  and  increasing  all 
other  rates  wherever  they  are  able  to  do  so.  Consequently 
it  would  probably  be  fair  for  the  Commission  to  consider 
the  territory  as  a  whole  were  it  not  for  the  fact  that  there 
are  extraordinary  differences  in  conditions  in  one  portion 
of  this  vast  territory  compared  with  another.  The  differ- 
ences between  Arizona  and  Illinois  are  greater  than  those 
between  New  York  and  Florida. 

In  the  present  proceeding  it  is  also  true  that  the  bulk  of 
the  advances  are  from  points  located  east  of  the  Rocky 
Mountains.  In  this  territory  also  there  are  widely  differ- 
ent conditions  in  the  traffic  handled  and  in  the  financial 
status  of  the  railroads  concerned.  In  recognition  of  this 
situation,  we  have  divided  the  territory  into  three  groups, 
the  Northwestern,  the  Southwestern,  and  Western  Trunk 
Line,  which  have  been  fully  described. 

There  have  been  many  changes  in  the  accounting  rules 
and  in  the  policies  of  the  railroads  that  cannot  possibly  be 
critically  considered  by  an  arithmetical  sum  of  figures 
applicable  to  a  miscellaneous  list  of  companies.  The  meth- 
ods of  accounting  differ  with  different  companies;  that 
alone  demands  a  separate  analysis  of  a  few  representative 
carriers  in  the  territories  we  have  described,  as  well  as 
the  summaries  for  a  series  of  railroads  serving  any  par- 
ticular territory. 


192  EARNINGS 

We  will  now  proceed  to  state  briefly  the  tendencies  of 
returns  on  capitalization  as  a  whole,  as  well  as  net  reve- 
nues and  gross  revenues  as  a  whole  in  these  territories. 
This  will  be  supplemented  by  a  somewhat  extended  anal- 
ysis and  application  of  the  other  tests  to  which  we  have 
referred  above. 


EARNINGS 


193 


The  railroads  in  the  Northwestern  group,  covered  by 
this  table  are  shown  on  the  accompanying  chart. 


* .  o   u 


•t     o. 
*  >  J  <r  '■ 


194  EARNINGS 


The  accompanying  table  shows  the  book  value,  total 
capitalization  and  earnings  of  the  railroads  in  the  North- 
western group. 


EARNINGS  195 


| ° Soil 

JO"     cq 


3° 

«  s  a 
£&8 


sis 

0.35 

5 


«  2  a  « 

111-* 


Hal 

as 


Bj,d     <* 


wQNoa   1  ©f*cof»coc©   1  ^ff  »ocmco   1  eogoco^e©^   |  00  co  co  10  cm  01   l  <©»-< 
ioqh;»p3>      «-;cm©coco^«   [  **>  cm  t^  ©  co  tq      co©©-"*  »-<©   I  •<*;  cm  iq  00  00  co,   I  t^t^ 

*<»"  ^  »o  ^  f"      tjJ -"  -^ eo  10 cd      ^"^©cocoad  1  Noiciddoo  I  os  os  co  t-*"  os  ao"      cot- 


CMt-©-*© 

ft©tOCMCO 

co"t>~^ ."(oto 
10  ^j*  cm  •**<  CO 

CMftiOeDCM 
©"co"cO*CM*©* 
CM  ft  CM  CM  ft 


cocftCMr*o 

■**<  ft  CM  ^  CO 

t*>~os*  co*©*cm" 

CMf«  *g«*OCM 

co^oqcop-^ 

t"»  CO  CO  CO  CO 

^  iO  COO  f« 

•* -^  ^  *o  *o 


OS  —  ©  — <  -^  -*• 
-"(f  CO  CM  t^  00  00 
CM  t^-^W3^H«-^ 
CO  t>~^  CO  f*  o> 
~£  ~5  CM  ©  CO  tO 

t~—  CO  O  Ol  ©  o 
OS         CMft  C0*O 


co  r-  to  **  ©  r- 


t^OO  "*  ©  CO  GO 

3  00*©*  CM*  p«  co" 
00  H  ft  01  r-  1^- 

C0»O  W3ioco  t» 


©  t"—  **•  CO  ©  *• 

oi  id  a  10  «  w 

^m  f^©  t>^CM  ft_ 


CM  OOOO  COCO 

eot^co'co-H  t-C 

"*f  ft  CM  f»  CO  W5 
■^00  CO  t*^  CM  p 

c*  frost-"*  ft"  cm 

t>- CO  coo  coco 
OCO  COO  OS  OS 
CO 


J  CO  >0  .O 

>TPIOO 

>b-©  co 


f»  f<  C?  OS  CO  CO 
tO  OS  ©  f 1  CM  f« 

CO  ftftflfl 


OS  OOOO  CO  wC 


ft  06  ^*  I"—  CO  *** 

cm"  co  ©*  r-"  ■*»"  r^~ 
r^ooTf^H© 

<*t  ©  1-1 ft  CM  ^ 


OOS  CO  CM  CM  3" 
CMf©-*«f<© 
W5CM  CO  CO-*  00 
»0  iV  CM*  GO  CM*  CO* 

W  CO  OS  lO  CO  *-• 
ooos_*-^co^h  CO 

CO  CM  CO  CO  CO  ^* 
lO  CO  CM  ft  ^Jt  CM 


00  «-h  »o -^r^© 

tO*O~co"c0  ©*t--* 
CO  ft  OS  ©  to  f< 
©CO  OS  CO  CM  U3 
CO*  ©*  CO  ^* t*-* CM* 

OO  ^J*  ^^Tf  "** 


SO0 


CM© 


ftlOf©©      I     OH^H 


S»o©   I  cococoooos© 
ft©    1   eo  OS -^  co  GO  CO 


*Ot*-©COf-<0    I    CM  CM  t^  CO  "*  ©    I    COOS 


—  co  ~a  a:  n 
csr-©^^ 


O  CO  CM  ©CO 


»C»OCOiO-* 


CO  ©  ^f*o^ 


OOCMb- »-*CO 

c©*to*i-*~t-*© 


CO  «  CM  -3*  CM  ■**« 

S©  -cr  os  os  os 
.©"*  ©©CM_ 

©*  co"  "^f  co"  OS*  CO 


N»O(NC©^0q 

cm  06"  co"  r-~  f*  ©" 

CO*-*  f-*Of«© 
CO  OS  ^*  ^  """l*-" I 

t*-*  r^~  *o  «5  h^  © 
cm r*-r—  co  ©*^ 

CO  CM  CM  CO -^  lO 

»0*^**-~^h"^*^h 


CO  CO  CM  CM  ^  40 


■^h  OS  OS^  CM  CM 


coco  ©'-•  r^  cm 

t^-o^oio^co© 

CO  CO*  OS  lO*  CM*  CM* 
N<hco»OC<0 


SOS  CO  ©  ^  CO 
^ior-©  ©© 

■-'  —  —  CM*  CM*  CM* 


©t^-^CMcOCM 
r-©CM  cOCMt^ 

«5  W3©©"*  © 

S*  lO*  CD*  -«**  00*  ^ 
©  CM  OS  CO  lO 
CM  t^u3  <-h©OS 

^^i>Tco-hco 

Tt<  CO-^  >OCi0N 


)OH 


t^o^co^ 
to  co  ac  x  ^^ 
^coooi-^eo^w 

COuO©"'*^©" 

CO  OS  CO  ^O  i— I  »o 

"^"t  °-  t^°l  "*L 

S*  OS*  ©*  t^"  CO  00* 
OSt^—^CM  b- 

"*l  ®-  "i  *!  *°-  "^. 

OS*  CM*  CM*  CM*  CM*  CM* 


O0CMCM'*©© 
00  CO  ^-"  t-~  lO  IM 
©lO^COiOCO 
CO*  ©*  OS  t>^  co"  U5 

•**«  "^<  GO  CO  »-*  OS 

4*  ©  cm  b-  ©,00 

CM*  ^h"  M*  CO*  ©*  »o" 

os  os  00  r-  i-H  o> 


NOO»O^C5 

cococo_o6'*'^i 
T»*i-"eo  ©"as"*-" 
■*»oos~ 

t^CMt^. 

OS*0*©*W5  ^  CM 


3"". 


S  2<  ^ff  of 


oswjeo^r*  |^^H©-a*coco 

co  co  co  os  os  I  t^  t^  cO  p  OS  CO 
^^*»O^CO  I^VcO^^^iO 


CO^O©00COCM 


lOcON^Qin 

cMpt^co©-^; 

CO*COI>I|>COCO 


r*©  00  co  go  © 
00  *-;  co  co  p  "^ 

CO  O  tO  "O  iC  *c 


CM  CO  CO  "»*<© 
»0©COCMt^- 


cm  »o©  ^r  »o 


—  — 1,»- n 

CM*  CO*  CM*©*©* 
iO  *C  CO  CO  *0 


c:  co  >^  <-n  o-i  t^ 

CO  t-  CM  CO  00  ^^ 

t*os_r^os  ^»o 

U5  »0 -^  OO*  CM  CO 

00 1--  ©  to  ©  •**< 
b»cq  ©^©  cm  *0 
CO*  t^*  OS"  CO*  CM  ©* 


M 


■  ■*«OiONCO 


S— I    —    -H    CO 
CO  CO  CO  ^H 
■^oqCM  W5CM 

co*  co"  »o*  eo"  ^t" 

OONCOOON 

^h  co  00  ^*o 
©"■^"os""**-^" 

i-«-*coCMCO 
^-.^m^CMCM 


O*  0>  CM  ^h  cO  CO 
©  t—  CO  •&  b-CM 


CO  OS  CM  ©  ©  00 
^  I--  ^«  CO  *-•  © 


IQH^^i-l^ 


»C  CO  CM  **  OS -*f 

SCOrf^CO-* 
^cot^-p  iO^© 

CM  CO  t^*  ^  CO*  *©" 

CO  CO  CO  t—  CM  t^- 
CO -^cous©© 
»o*  t>~  OS  t>-"  eo*  »o* 

^00  00O-"H 
CO  ^^^H 


i-iiC«CO«N 
tO  9  to  10  9^1 

^©_CO  t^co^t^ 

©  to  CO  "?  "o  eo 

r-CMco-^toiO 
sftog  lo'f'-r 

CI  -h  O  CO  CM  CO 

cs  »o  co  o  t^r>- 

■  y  — "  ^h  P*  i-i"  »J 


«Tt  OO  t^-  CM  iQ  © 

CO  »C  CO  OS  CM  »0 
W5  CO  b- ^  '^  CO 


■*cococ3o^ 
iO~  "^"  CM*  ©*  co*  gS 

3  CM  Tf  -^  CM  CO 

,-  — 1 . , 


—  — I IO  00  B  • 
IQMgC  to  BQ 

00  co_  co_  »o_  t^  -^ 

cm"  os  op" -^"  »o* — " 

GO  CO  CO  OS  --t"  CO 
^  p  CM_  ©  CO -^ 
CO*  OS*  CM*  CO*  ^  CO* 
~i  ->-icc  ^  Oto 


CMCMOCMCOTt* 
CO  to  ©  CO  i-i  «-« 
CO  '~lc*tlu^,>lCM 
CO*  ©  -H"b^  m"  OS 
©iO-h*OCOCM 

©  ©  ©  t*-  cO  © 

cm*  Tt*  t^r  cm" -*r  co" 

t-- -*  CO  CO  co  »o 

CO  1-1  ft  ^H  1-*  ^H 


©  CS  ©  QN<N 
1^-  CO  CM  CO  ft  © 
SMMCtflfi 

©"  cm"  00*  cm"  CM*  CO* 

Sft  tO  f*  «3  CM 
^■*f^©CM-^ 

to*  ao*  •«**  00*  -*f  cm* 


©00 

t^eo 

©  tO_ 
CM*»0~ 


•III!  Ill 

:  :  :  :  :    »  : 

lllllill 

i 

.  .  10  .  . 

Ml!! 

.  .     -   .  . 

Mil; 

Hill 

. .  0  •  •  ■  • 

;i  liiii 

£o^««* 


ocooaoooao  ao  ao  ao  oo  co 


c-iose 


rt9ll 
*j|l 

a5-3 
III 


4S 

id 


all  1 


U*3 


**  3  J 

*I  -I 

a  l  a^ 

5  1  2-2 

aaaa 


196 


EARNINGS 


*& 

1 

•  rH 

QQ 

•  i-H 

A 

Si 

o 

B> 

s 

Fh 

a> 

-*-> 

m 

<D 

1* 

rd 

S-» 

u 

o 

£ 

o 

5 

.3 

d 

o 

•  i-H 

4j 

as 

J 

r— 1 

c3 

-*-> 

•  i— i 

a 

d 

© 

^W 

3 

o 

0 

i— i 

G5 

> 

r* 

o 

o  -e 

rO 

- 
o3 

S^ 

o 

O 

xn 

bn 

&pfl 

d 

rH 

•  i-H 

r*» 

d 

u 

c3 

cS 

A 

© 

a 

rd 

o 

Q 

B 

«4H 

«3 

o 

<D 

p->^ 

O  -4-s 

>% 

rQ 

s^ 

q> 

0) 

-*j 

-4-3 

o> 

5 

EH 


V<  -5S     2 


<N 


EARNINGS  197 

The  return  on  book  value  and  capitalization  on  the 
Southwestern  group  during  the  25-year  period  is  given  on 
the  accompanying  table  (L).  While  the  returns  are  sub- 
stantially lower  than  in  the  Northwestern  territory,  it  will 
be  noticed  that  in  recent  years  they  have  been  getting 
onto  a  slightly  higher  plane,  than  formerly. 


198 


EARNINGS 


in! 


is 


J  i 


—  «=  ~  -r  : 

~   -~  j~   s  : 

e»e«    "  — 


Q 

S>RS  »4  re 

8"aer-^  — o 
•*s>»  —  r- 
•e  x't^cxs 
r*r<  =  r»  — 
re_t^£-»ce 
oct^eet^— 


a 


'■♦■d«3«o«c  I  •o^-icr^co^'  I  •c^reoireoi  I  eseo 


o 

—  C5  re  re  *  •-• 
CC:qr:cc: 
re  o  ♦ •  ei  x" 

c  5  >■:  ?  S  - 
t^~  o  c*r»x 
■sei—  re  acre 


—  —  —  —  —    '    ?^  —  —  t-  I~  l-~ 


t~»=  e  O  ~ 
—  x_re_re  x 

S*C*X*x"x~ 
=  s;  3  x 


X  N  c:  o  C: 


n  — c  re 


•  «s>s«3ie 


^■»=c  r~—  x 

OC  — -*X«iO 

re  ar  =  t^  «;  re 


c  x  r^  c  s  s 
c»c*rererere 


====== 

»..»..*-.-.  re  re 

«  =  si  =  t  IS 
x  x  re  —  —  cr 
t-reiere  c»  re 

re"  »;">=  =  •="  s? 

C:  =  «=  =  B  » 

cTcTo'-^ioo 
re  O  c->  ■«■  B  t-- 

B  ;=  =  =c  =c  => 


c*  re  re  »o  re  a 
cs  «  — "  x>  ci  a5 

s-B--BBe- 

<o  re  ♦  ie  r<  re 


----- 

—  x  x  x  x  re 
re  o  c:  o  c:  re 

—  re  i>-  —  —  x 

XX  S:  =  ■*•  » 

•*"=:":*  — sTe" 

©  c"o»  o~  t^  -*sr 

—  cs  —  r^  =^»o 

c*  te  r*-  t*-  r-  t^. 


s.sssqi 


—  tcr-^rere— • 
c:  rec*c«rec* 


re  £ 


8S2SSSSS3 

—  —  0f —  2^xe 


:  r;  x  ?;  «  m 


t-  f^  r*  —  u~  :-        .  - 


Q  Q  —  r*  ?*  C? 


■3  H 

si' 

58  MB 
©"— " 


**«J3*- 


.    £rej  = 

-E5J 


3  a  «^ 


Sc-;c       —  «  ■  ^  H  -r       t-  x  o  r:  re  re       —  : re  —  —       —  —  =  .-~  —  : 
=r  ~  —  re    r  cnc:-^-      ^xissje      e  re  x  ^  x  c*   !  k^  —  «  -r-  c  < 
csrecireci  I  to e* »-« ei ci ee  I  e>» re ■*  <*'«r •*  I  » W> ■* <j n ■»  I  ■^■■^cococot 


e5c 
eo« 


n  B  >.-  —  — 

—  •=  =  —  =: 
eVccn 


net--  • 


X£3«C 

cs  ic  re  —  r— 
t^— ocr-^o 
c»cs  tCic  re* 
t>-  c^  x  ^  ^ 
cs  ret-cs  — 
c"ietCr-~-<f" 
re  ^  ^  x  — 


-r  x  re  =•  M  = 
re  ok;  ^  c:  ^ 
Nneeoio 
•>:•  re  —  x  >=  v- 
t~-  —  ^  ^  r^  t"— 
C)  —  M  C  V  =:' 
t-Tscreo  — 
X  t~  ■»  "O  —  t» 

re"  m" —"'•  —  = 
re  r«N«rert 


;xjccn 

sqniqoio 
— "re*re"c*i^re 

=  t^X  ■«•  X  — 

«e  re  — 

re  -^  ^  to  t^t* 


iff  o  X  re  £->r 

r~  «.-  r^  a  —  — 

X  sc  O  r^  ^  re 

3  3  =  a  =  = 

NSOKKX 

ecrerjiex" 

<e  o  x  re-<r  •» 


ereo»-»X) 
d  cc*a  s»  t-ie 
~  — —  t^  =  c 
CCM-Jr 
c«  =  t-o«e 
— "o"cTrJre"<s 
«^  — =  —  « 

<c  — cc  — -^o 
9    n  -  •-  —  .-r 

If*— *— » 


*2r;*NX 

Nr--»er-tt  x. 

r>  £  x  —  —  o 
x  —  ^  x  m  o 


St  —  =  -^-r-  = 

x  t^t-  x  r^  2 
xsxCMe 
t~*£<5<5*i :o" 

~xrci~* 
x  -^*  »  o  c; 

—  t~xot-x  I  ncsxxx 


<e  o  rer~  —  o 

r~  —  —  r:  -:  — 
recs  ncsc 
ccoWe 

■  -  X  X  X  X 


■»?■*■■<?•  o  r»  o 

t~^  a  ='  W  re  t^ 
■«r  re  r^re  t^re 
«e«o«c  — o 

§—  :~  ."  i?  = 
I —  t—  xxc 
—  re"  .;'  — ■  r-  re" 

SCfMXr 
Ch-  X  *  C 
s------ 


—  ?>!  —  «  X  — 

O  ^  »C  X  ?*x 
Nre^sc^si" 

—  C:  r~c=c:  x 

8"t-raeie— "<c 
— -^rereio 
p«c«reTr'*-» 


r<  re  t—  tc  t-» 
X  C*  C!  c  c« 
re  re  c^  re  ?< 


isxx;n ' cxmc; 


o  r-  re-«r  —   |  — •  ^ 


recj  — eicici  |  cieo^^^ee  |  Wre'Vib'*'*  |  ••■♦cere Vre  |  V 


I** 


5-5 


---.-: 


»  i 


v_  —  1  -_ 


-   -    —  c  -:  r^  =■  l-'  . 

Sre  x  ?j      -j  x  re  x  : 
oor>T  eo 


- 


S5SSS     -SSS^gg     5|:22J     5gg5|l 
xxxxx      j^xxxxx      ^5s>SSS     fc*S  — 2: 


EARNINGS  199 

We  have  not  had  the  time  to  make  an  analysis  of  the 
true  situation  on  the  Southwestern  lines.  These  are 
merely  surface  figures,  as  given  in  their  reports,  without 
a  close  analysis. 

Further,  it  may  be  stated  that  we  have  not  had  the  time 
to  make  a  check  of  our  summaries  previously  given  for 
the  Southwestern  group,  and  we  do  not  ask  that  much 
reliance  shall  be  placed  upon  the  same  for  that  reason, 
and  especially  until  a  more  thorough  investigation  has 
been  made  of  conditions  in  the  Southwest. 

The  following  tables  are  similar  to  those  shown  in 
Commissioner  Lane's  opinion  in  the  Western  Eate  Ad- 
vance Case  of  1910  and  appearing  on  page  347  of  volume 
20  of  the  Commission's  reports.  Commissioner  Lane 
adopted  4%  as  the  interest  rate.  Instead  of  that  we  took 
the  actual  average  rate  of  interest  paid  last  year  by  each 
railroad.  This  made  the  return  on  stock  slightly  lower 
than  it  would  have  been  had  we  taken  the  straight  4%. 
We  also  made  a  reduction  in  the  net  income.  Instead  of 
operating  income  used  by  Mr.  Lane,  we  made  deductions 
for  net  rents  and  lease  of  roads,  which,  on  each  of  these 
four  roads  reduced  the  net. 

The  tables  are  compiled  by  ascertaining  the  net  operat- 
ing income  per  mile  for  each  of  these  roads  and  determin- 
ing the  ratio  it  bears  to  an  assumed  valuation  of  $40,000, 
$36,000,  and  that  found  by  D.  F.  Jurgensen  for  each  road, 
per  mile  of  single  track,  by  considering,  first,  that,  the 
total  capitalization  of  the  road  was  all  represented  by 
stock ;  and,  second,  that  two-thirds  of  the  total  capitaliza- 
tion was  represented  by  bonds. 

The  net  operating  income  used  is  obtained  by  deducting 
from  the  net  revenue  for  each  road  each  year  the  expenses 
of  outside  operations,  taxes  and  debit  balances  in  the 
hire  of  equipment,  joint  facility,  rent,  miscellaneous  rent, 
and  lease  of  road  accounts  and  by  adding  the  revenue 


200  EARNINGS 

from  outside  operations  and  credit  balances  in  the  hire  of 
equipment,  joint  facility  rent,  miscellaneous  rent,  and 
lease  of  road  accounts. 

For  example,  the  net  operating  income  of  the  Chicago, 
Burlington  &  Quincy  for  1914  is  shown  to  be  $2,796  per 
mile,  which  makes  a  return  on  $40,000  value  per  mile  of 
7% ;  but  if  two-thirds  of  this  value  of  $40,000  per  mile  had 
been  borrowed  at  the  actual  rate  paid  by  the  Burlington 
in  1914  on  its  total  funded  debt  and  the  remaining  one- 
third  represented  stock  issued  at  par,  the  stock  would 
have  earned  12.8%. 


EARNINGS 


201 


4) 

-  - 

k 

c  c 

«  3 

boo 
£ 

5  a 

o  o 

Jurgen- 
sen's  valu- 
ation   per 
mile    pres- 
ent cost 
depreci- 
ated, in- 
cluding 
general 
expendi- 
tures 

qj  U  O 

1    09  03 

co-c 

^5* 

03 

o 

-  oj 
co  h 

"5  fee 

-  e 

*s 

££ 

is 

oh  « 

c£2 

£h  I 

-•* 

~  o 
3  J 

09 

o 

Og 

©  cd 
-*  E 

1  bo 

a  a 

gl 
S* 

■  941 

a>i  o 

■    03  05 

O'O'O 

^25 

i 

Net 
Oper- 
ating 
Income 
Per    Mile 

s 

« 

kO        OOiHCvluo 


fcS>        riH'-|H 


* 


# 


at-cooo 
-tdoot-' 


ice*  oo 


jJO       HHHH 


oooiao 

■~  so  r-i- 


teeqento 
r-c©o»o> 


i-INCO-* 
i-lr-HHi-l 

C5  C7>  CiCTS 


OHeoia 
■*  ci  ee  •*»«' 


UiOJCOt- 

t-«eodt- 


isoiiao 
oodcii-J 


■*00Ol9 

coioc-<o 


e-etjioi-j 
oot^oos 


t*-  co  cocn 
id  idee  id 


U5t-t-;«0 

id^edod 


t-iac-^o* 


to  co  to  cj 


CO  CO  CO  CO 


•*C-t-C» 

•*coc^<d 


tst~«ooo 
laent-co 

t-TOt- 


soen©-* 

doidoi 


lOOlO"* 

en  oo  en  oo 


woian 
eminent— 

OOOIOM 


.-inco^ 

iH»-li-<rH 


r-teMCO-f 
1H1H1H1H 


<-li-li-l«H 


202  EARNINGS 


CHICAGO  &  NORTH  WESTERN  RAILWAY  COMPANY. 

The  North  Western  Railway  is  leading  the  present 
fight  for  advances  in  freight  rates.  This  makes  an  anal- 
ysis of  its  operating  and  financial  condition  of  peculiar 
significance. 

The  North  Western  Eailroad  is  a  representative  line, 
in  that  it  has  a  large  amount  of  both  main  line  and  feeders 
that  lie  in  the  direction  in  which  the  traffic  moves,  and 
reaches  the  chief  terminal  in  this  part  of  the  country, 
Chicago.  Over  90%  of  the  mileage  of  the  North  Western 
is  located  within  the  states  of  Iowa,  Minnesota,  Nebraska, 
North  Dakota  and  South  Dakota. 

During  the  year  1913  the  net  corporate  income  of  this 
company  above  all  charges,  including  expenses,  taxes  and 
interest,  amounted  to  $14,800,000,  yielding  a  return  of 
9.76%  on  all  its  capital  stock  outstanding.  Last  year, 
during  the  period  of  depression,  it  earned  over  $12,000,000 
net  corporate  income,  amounting  to  8%  on  all  its  capital 
stock  outstanding  in  the  hands  of  the  public  (Powell  Ex- 
hibit 2,  page  5).  That  these  returns  were  quite  attractive 
to  investors  is  evidenced  by  the  fact  that  the  bonds  of  this 
company  sold  on  the  market  at  a  yield  of  less  than  5% 
during  1914,  with  the  exception  of  one  sinking  fund  which 
went  .2  of  one  per  cent  above.  The  stocks  of  the  North 
Western  sold  for  131  (Norton  Exhibit  3,  Vol.  1,  pages  5, 
128). 


EARNINGS 


203 


The  accompanying  table,  showing  the  freight  revenue 
and  train  loading  for  the  North  Western,  pictures  in  a 
striking  manner  the  progress  this  company  has  been  mak- 
ing during  recent  years. 

Since  1900  its  freight  revenue  has  increased  77%.  Its 
train  load  only  increased  44  tons  from  1900  to  1912.  In 
the  last  two  years  its  train  load  has  increased  49  tons. 
During  the  past  two  years  there  has  been  more  of  an  in- 


CHICAGO  &  NORTH  WESTERN. 


Year 


Freight  Rev- 
enue includ- 
ing switching 


Revenue   ton 

miles  per  mile 

of  road 


Revenue  tons 

per  train 

mile 


1890 
1891 
1892 
1893 
1894 

1895 
1896 
1897 
1898 
1899 

1900 
1901 
1902 
1903 
1904 

1905 
1906 
1907 
1908 
1909 

1910 
1911 
1912 
1913 
1914 


$19,786,220 
19,908,551 
23,219,377 
23,026,865 
21,131,679 

19,555,715 
24,773,452 
22,247,856 
26,988,408 
28,853,237 

31,919,796 
31,605,650 
33,530,673 
35,612,459 
36,849,498 

38,861,229 
45,296,131 
48,576,404 
42,836,539 
44,525,000 

50,562,949 
50,168,617 
48,057,471 
55,970,944 
55,321,350 


$477,983 
455,024 
538,624 
525,905 
389,990 

341,461 
482,151 
453,337 
597,017 
650,819 

691,976 
664,453 
693,823 
548,872 
548,606 

579,424 
691,758 
712,165 
633,765 
636,765 

729,100 
701,713 
646,526 
787,734 
769,610 


$138.10 
134.10 
141.78 
132.16 
122.68 

116.78 
140.36 
152.98 
193.08 
208.93 

254.61 
255.08 
267.12 
249.62 
244.59 

259.45 
285.91 
271.36 
261.38 
260.13 

260.71 
276.54 
298.94 
347.97 
347.61 


204 


EARNINGS 


crease  in  the  train  load  than  during  the  preceding  twelve 
years.  In  1912  the  train  load  was  only  299  tons,  while 
the  Chicago,  Burlington  &  Quincy  was  438  tons.  It  would 
appear  that  proper  economies  should  have  been  intro- 
duced at  an  earlier  date.  Notwithstanding  that  fact  the 
North  Western  has  earned  splendid  returns. 

The  accompanying  table  showing  operating  revenues 
demonstrates  that  fact. 

CHICAGO  &  NORTH  WESTERN. 


Year 

Single 

Track 

Mileage 

Operated 

Operating 
Revenues 

Operating 

Expenses 

Net 
Operating 
Revenue 

Total 
Mainte- 
nance 

1890  .... 

4,254.92 

$27,252,899 

$16,801,045 

$10,451,854 

$  6,304,815 

1891  .... 

4,273.54 

27,930,195 

17,291,239 

10,638,956 

6,293,033 

1892 

4,273.54 

31,885,314 

19,253,416 

12,631,898 

7,266,557 

1893 

4,273.54 

32,509,312 

20,718,532 

11,790,780 

7,779,443 

1894  .... 

5,030.78 

31,489,948 

19,385,263 

12,104,685 

6,702,680 

1895  .... 

5,030.78 

28,098,148 

17,109,938 

10,988,210 

5,663,466 

1896  .... 

5,030.78 

33,889,411 

20,529,658 

13,359,753 

8,512,359 

1897  .... 

5,030.78 

30,864,606 

18,419,537 

12,445,069 

6,980,509 

1898  .... 

5,085.62 

36,055,846 

22,523,374 

13,532,472 

9,249,831 

1899  .... 

5,085.62 

38,764,378 

23,823,748 

14,940,630 

9,902,700 

1900  .... 

5,571.23 

42,964,470 

25,693,001 

17,271,469 

9,990,146 

1901  .... 

5,585.53 

43,256,721 

25,778,694 

17,478,027 

9,459,500 

1902  .... 

5,930.26 

46,764,196 

28,553,186 

18,211,010 

10,820,685 

1903  .... 

7,365.63 

50,290,804 

31,305,616 

18,985,188 

11,412,704 

1904  .... 

7,411.77 

52,804,428 

34,646,822 

18,157,606 

12,589,235 

1905  .... 

7,408.13 

55,177,925 

35,561,778 

19,616,147 

13,812,240 

1906  .... 

7,453.58 

62,830,896 

39,199,833 

23,631,063 

15,815,500 

1907  .... 

7,622.91 

68,160,690 

44,133,214 

24,027,476 

17,505,184 

1908  .... 

7,632.23 

63,219,344 

.41,630,035 

21,589,309 

14,806,401 

1909  .... 

7,637.97 

65,978,471 

43,191,239 

22,787,232 

16,268,234 

1910  .... 

7,629.39 

74,175,685 

52,153,619 

22,022,066 

19,923,555 

1911  .... 

7,743.48 

74,918,186 

53,012,710 

21,905,476 

19,309,269 

1912  .... 

7,960.45 

73,698,592 

52,701,843 

20,996,749 

18,938,574 

1913  .... 

7,975.94 

83,035,921 

58,252,780 

24,783,141 

23,069,683 

1914  .... 

8,094.94 

83,677,051 

59,405,142 

24,271,909 

24,366,813 

The  net  operating  revenue  of  the  North  Western  in  1913 
was  $24,700,000,  being  greater  than  in  any  other  year  for 
which  we  have  records.  In  1914  it  fell  off  half  a  million, 
but  it  was  still  greater  than  in  any  other  year  excepting 


EARNINGS 


205 


1913,  only.  In  1913  the  North  Western  increased  its 
maintenance  to  a  figure  that  is  $4,000,000  greater  than  in 
preceding  years;  an  increase  of  over  20%.  Not  content 
with  that,  the  following  year,  1914  (the  year  of  depres- 
sion), they  increased  their  maintenance  another  $1,300,- 
000,  even  over  the  high  year  of  1913. 

The  accompanying  table  shows  how  the  people  have 
fared  who  have  invested  their  money  in  the  North  West- 
ern property.  They  have  not  passed  a  dividend  in  the  last 
twenty-five  years. 

CHICAGO  &  NORTH  WESTERN. 


Year 

Rate  of  dividend 
Common 

Rate  of  dividend 
Preferred 

Rate  of 
Interest 

1890  

6.00 
6.00 
6.00 
6.00 
6.00 

4.00 
5.00 
5.00 
5.00 
5.00 

6.00 
6.00 
7.00 
7.00 
7.00 

7.00 
7.00 
7.00 
7.00 
7.00 

7.00 
7.00 
7.00 
7.00 
7.00 

7.00 
7.00 
7.00 
7.00 
7.00 

7.00 
7.00 
7.00 
7.00 
7.00 

7.00 
7.00 
7.00 
8.00 
8.00 

8.00 
8.00 
8.00 
8.00 
8.00 

8.00 
8.00 
8.00 
8.00 
8.00 

5.54 

1891  

5.24 

1892  

5.34 

1893  

5.29 

1894  

5.28 

1895  

5.32 

1896  

5  37 

1897   

5  36 

1898  

5  26 

1899  

5  19 

1900  

4  93 

1901  

4  85 

1902  

4  85 

1903  

4  79 

1904  

5  12 

1905  

5  12 

1906  

5  14 

1907  

5  09 

1908  

5  10 

1909  

4  73 

1910  

4  95 

1911  

4  57 

1912  

4  37 

1913  

4  41 

1914  

4  30 

The  rate  of  dividends  fell  in  1895  to  4% ;  they  had  been 
6%  in  1890.  It  did  not  take  a  general  advance  in  freight 
rates  to  recover  from  the  period  of  depression  at  that 


206  EARNINGS 

time,  when  these  companies  were  not  so  thoroughly  blest 
with  public  regulation  as  they  are  today. 

While  the  return  in  cash  dividends  to  the  stockholders 
annually  has  increased  on  the  North  Western,  its  interest 
charges  have  declined. 

By  looking  at  Powell  Exhibit  No.  2,  page  5,  it  will  be 
noted  that  there  has  been  a  decline  in  the  average  rate  of 
net  operating  income  to  book  value  since  1906.  If  the 
accounts  were  kept  on  the  same  basis,  and  there  was  the 
same  amount  of  new  construction  being  made  constantly 
from  year  to  year,  and  if  the  North  Western  had  excluded 
from  its  property  investment  all  property  upon  which  it 
was  not  entitled  to  rely,  in  demanding  an  advance  in 
freight  rates,  that  situation  would  be  significant. 

It  is  undisputed,  however,  in  this  record : 

First,  that  the  property  investment  is  not  compiled 
upon  the  same  basis  since  1906  as  in  former  years ;  and, 

Second,  its  operating  expenses  are  not  compiled  since 
1906  on  the  same  basis  as  in  former  years. 

By  careful  analysis  we  have  found  by  the  testimony  of 
Mr.  Chambers  that  this  company  has  expended  over  $12,- 
000,000  out  of  operating  expenses  during  the  past  seven 
years  in  improving  its  property. 

The  most  important  fact  in  connection  with  the  North 
Western  is  the  remarkable  amount  of  new  construction. 
Since  1907  this  company  has  increased  its  property  $110,- 
000,000,  almost  50%  in  seven  years. 

The  average  age  of  this  new  property  that  the  North 
Western  has  acquired  since  1907  is  less  than  three  years. 
This  average  age  is  computed  by  using  the  fiscal  year  of 
1914  as  the  base,  and  assuming  that  property  constructed 
that  year  had  an  average  age  of  six  months  during  the 
year ;  the  property  constructed  the  previous  year  an  age 
of  one  year,  and  so  on,  for  preceding  years. 


EARNINGS  207 

No  person  with  any  practical  acquaintance  with  Amer- 
ican railroading  would  expect  a  vast  property  costing 
over  $100,000,000,  less  than  three  years  of  age  on  an  aver- 
age, to  yield  a  return  the  same  as  on  a  well-seasoned  rail- 
road from  twenty  to  fifty  years  of  age. 

The  constant  close  relationship  between  the  increase  or 
decrease  in  rate  of  return  and  the  increase  or  decrease  in 
property  is  very  striking.  Making  due  allowance  for  the 
panic  year,  let  us  review  that  trend. 

In  1890  there  was  a  property  investment  of  $155,000,000 
and  a  return  of  6.19%.  Up  to  and  including  1893  the  an- 
nual increase  in  the  property  is  very  slight,  amounting 
to  less  than  $4,000,000  in  each  instance,  and  the  rate  of 
return  remains  practically  constant,  in  1893  it  being  prac- 
tically the  same  as  it  was  in  1890.  Then  came  the  panic 
year;  there  is  an  increase  in  the  property  of  $14,000,000 
and  a  slight  decline  in  the  rate  of  return.  The  following 
year  there  was  an  additional  decline  in  return  because  of 
the  general  financial  situation.  The  next  year  the  prop- 
erty is  reduced  and  the  rate  of  return  increased.  The  next 
year  a  slight  increase  in  property  and  the  rate  of  return 
quite  constant.  The  same  for  1898.  In  1899  the  property 
remains  practically  the  same,  while  the  rate  of  return 
shows  a  substantial  increase.  In  1900  the  property  in- 
creased less  than  $5,000,000  and  there  is  a  very  substantial 
increase  in  the  rate.  The  next  year  there  is  a  slight 
increase  in  the  property  and  a  slight  decline  in  the  rate; 
the  next  year  a  slight  increase  in  the  property  and  an  in- 
crease in  the  rate.  The  next  year  an  increase  in  the  prop- 
erty of  $28,000,000,  accompanied  by  a  decline  in  the  rate 
for  that  year  and  the  next  year.  In  1905  the  property 
remained  constant  and  there  is  a  slight  increase  in  the 
rate  of  return.  In  1906  there  is  a  $7,000,000  increase  in 
the  property  and  a  substantial  increase  in  the  rate  of  re- 
turn. In  1907  an  increase  of  $11,000,000  in  the  property, 
with  a  decline  in  the  rate  of  return.  In  1908  we  have  the 
panic  year  again  and  a  decline  in  the  return.    In  1909 


208  EARNINGS 

there  is  an  increase  of  $9,000,000  in  the  property,  accom- 
panied by  a  rate  practically  the  same.  In  1910  there  is  an 
increase  in  the  property  of  $30,000,000.  This  is  accom- 
panied by  a  decline  in  the  rate  of  return.  The  next  year 
there  is  another  large  increase  in  the  property,  amounting 
to  $13,000,000,  accompanied  by  a  decline  in  the  rate  of 
return.  The  next  year  there  is  an  increase  of  $18,000,000 
in  the  property,  accompanied  by  a  decline  in  the  return; 
the  next  year  an  increase  of  $10,000,000  in  the  property, 
accompanied  by  a  slight  increase  in  the  rate ;  the  next  year 
another  large  increase  in  the  property  of  $22,000,000, 
accompanied  by  a  decline  in  the  return. 

Summarizing  the  entire  period  we  find  from  1890  to 
1906,  an  average  increase  in  property  per  year  of  about 
$4,500,000,  and  a  constant  increase  in  the  rate  of  return 
on  property,  varying  from  time  to  time  almost  exactly 
with  the  large  or  small  increase  in  the  property.  From 
1906  to  1914  there  was  an  increase  of  $120,000,000,  in  the 
property,  an  average  of  $15,000,000  per  year,  accompanied 
by  a  decline  in  the  rate,  except  for  those  years  when  the 
increase  in  the  property  is  slight,  at  which  time  the  rate 
of  return  immediately  recovers,  and  starts  forward. 

Wherever  there  is  a  large  new  construction  in  progress 
there  is  a  corresponding  large  increase  in  maintenance 
expense,  which  includes  the  labor  and  other  items  con- 
nected with  those  betterments  and  improvements.  Such 
a  situation  would  enable  a  company  to  make  the  net  in- 
come very  small  indeed  in  the  most  prosperous  years  of 
the  system.  In  Mr.  Chambers'  computations,  where  he 
demonstrated  $12,000,000  charges  of  that  character  di- 
rectly connected  with  improvements  of  the  North  Western 
property,  and  in  entire  excess  over  the  preceding  seven- 
year  period*  iifinade  adequate  allowance  for  increases 
in  cost  of  labor  and  increase  in  the  size  and  efficiency  of 
the  equipment. 

This  increase  is  a  betterment  or  improvement  on  the 
property,  paid  for  out  of  operating  expenses,  which  Mr. 


EARNINGS  209 

Felton,  the  President  of  the  Great  Western,  and  Mr.  Bush, 
the  President  of  the  Missouri  Pacific,  both  stated  on  the 
stand  could  be  done,  and  had  been  done  by  various  rail- 
roads in  this  section  of  the  country. 

Another  important  change  relates  to  the  charging  of 
additions  and  betterments  out  of  surplus,  to  prop- 
erty investment  after  1907,  according  to  the  ruling 
of  the  Commission.  It  is  quite  difficult  to  find 
out  how  many  additions  and  betterments  have 
been  charged  to  surplus.  However,  taking  the  sur- 
plus earnings  that  were  available  for  this  purpose 
between  the  years  1907  and  1914  inclusive,  we  know  that 
the  North  Western  has  had  approximately  $28,000,000  in 
funds  of  that  character,  available  for  that  purpose,  and 
further  we  know  that  the  company  has  spent  that  much 
more  for  new  property.  Prior  to  1908  the  rules  did  not 
require  it  to  charge  such  additions  and  betterments  to 
property.  Here  is  another  important  change  in  the  ac- 
counts that  alters  the  base  figures  and  consequently  in- 
validates the  comparisons  to  that  extent. 

The  addition  of  the  depreciation  account  to  operating 
expenses  also  occurred  in  1908. 

We  find  the  North  Western  has  been  keeping  its  ac- 
counts differently  from  the  Burlington.  A  part  of  the 
depreciation  charges  in  the  case  of  the  North  Western 
we  believe  is  proper  and  Mr.  Chambers  so  allowed  it. 
This  situation  we  also  find  quite  different  from  that  on  the 
Santa  Fe  Railroad. 

It  may  seem  that  perhaps  the  rise  and  fall  in  return  on 
a  property,  compared  with  new  construction  described 
above,  merely  presents  a  series  of  coincidences,  and  that 
the  change  in  the  accounting  rules  of  the  Commission 
simply  happened  to  occur  at  the  particular  time  when  the 
tide  turned  in  the  prosperity  of  the  carriers. 

That  there  are  such  things  as  peak  years  cannot  be 
questioned,  but  the  fallacy  of  such  a  conclusion  as  just 


210  EARNINGS 

stated  can  be  readily  demonstrated.  Mr.  Wettling  and 
others  frankly  conceded  the  changes  in  the  rules,  but 
claimed  they  would  have  no  substantial  effect  on  results. 
Let  us  assume  that  the  change  in  the  rule  as  to  charging 
additions  and  betterments  to  surplus  had  been  made  in 
1900  in  place  of  June  30, 1907:  what  would  be  the  effect? 
Our  computation  from  Powell  Exhibit  No.  2  discloses  that 
the  rate  would  have  been  in  1906,  7.98%,  as  compared  with 
the  return  under  the  rules  existing  at  that  time  of  9.11%. 
This  is  simply  a  difference  in  methods  of  accounting.  Fur- 
ther, we  find  that  the  return  in  1900  would  have  been 
8.42%.  In  other  words,  the  decline  which  these  carriers 
have  been  discussing  would  have  commenced  in  1900  in- 
stead of  1907. 

Had  the  Commission  simply  adopted  this  different  pol- 
icy, hadja,  different  set  of  accounts  and  rules  of  bookkeep- 
ing, the  railroads  in  1910  could  have  stated  mournfully 
that  their  earnings  had  been  declining  since  1900 ;  that  the 
tide  had  changed  in  1900. 

Tjie^fortliJV'estern  Railroad  could  have 
Ihn  VftmnTTgBitTi^  under  that  system  of  bookkeeping,  not- 
withstanding the  fact  that  the  average  rate  of  dividends 
prior  to  1900  never  reached  6i/>%;  whereas  since  1907 
they  have  paid  7%  every  year.  They  could  have  told 
you  their  tale  of  poverty  about  things  going  to  the  dogs 
ever  since  1900;  they  could  have  proved  it  to  you  by  these 
figures,  in  spite  of  the  fact  that  their  accumulated  sur- 
plus in  1900  only  amounted  to  $6,900,000;  and  in  1910, 
it  was  $32,000,000.  If  the  rules  had  been  changed  in  1902, 
the  year  1900  would  still  have  been  the  peak  year ;  if  they 
had  been  changed  in  1903,  the  year  1900  would  still  have 
been  the  peak  year.  If  the  change  had  occurred  in  1904, 
1900  would  still  have  been  the  peak  year. 

Must  we  conclude  that  1900  would  have  remained  the 
best  year,  regardless  of  any  other  changes  in  the  items 
of  the  accounts  or  in  the  policy  of  the  carrier? 


ve  ami  that  fu 


EARNINGS  211 

Here  again  we  find  danger  in  accepting  surface  figures. 
If  in  1900  the  Chicago  &  North  Western  Ry.  Co.  had  de- 
cided to  enter  upon  the  policy  of  raising  the  standard  of 
their  freight  car  equipment,  leaving  all  other  parts  of 
their  operating  expense  upon  the  same  basis,  if  they  had 
expended  as  much  per  freight  car  in  1900  as  they  did  in 
1906  or  in  1914,  leaving  all  other  items  precisely  the 
same,  their  maintenance  allowance  would  have  increased, 
and  their  net  operating  income  would  have  been  de- 
creased by  over  $2,300,000,  making  the  per  cent  upon 
the  property  investment  drop  to  7.4%,  instead  of  8.63%. 
In  that  case  1900  would  have  been  exceeded  by  1901,  1902, 
1903, 1905  and  1906. 

These  facts  simply  demonstrated  that  the  changes  in 
the  accounting  policy  of  the  carriers,  to  which  we  have 
referred,  are  substantial  in  character,  and  must  be  reck- 
oned with,  in  any  attempt  to  consider  tendencies. 

Summarizing  Mr.  Chambers'  analysis  of  the  mainte- 
nance on  the  North  Western,  he  finds  during  the  years 
1913  and  1914,  that  real  maintenance,  exclusive  of  any 
betterments  or  improvements,  allowing  for  the  increased 
cost  of  supplies  and  labor  and  allowing  for  the  increased 
capacity  of  the  car,  would  have  been  per  freight  car  mile 
in  1913  8.38  mills;  per  passenger  car  mile,  8.51  mills; 
per  locomotive  mile,  6.7  cents,  and  for  1914  would  have 
been  per  freight  car  mile  7.92  mills,  per  passenger  car 
mile  8.20  mills,  and  per  locomotive  mile  6.42  cents.  Ap- 
plying these  to  the  maintenance  of  equipment  figures  of 
those  years,  we  find  the  excess  maintenance  amounting  to 
$2,069,860  in  1913,  and  $2,954,165  in  1914. 

Applying  the  basis  used  in  Chambers '  Exhibit  4,  page 
2,  for  maintenance  of  way  and  structures  and  adding  ad- 
justment for  ties  and  rails  for  those  years,  we  find  the 
excess  maintenance  amounting  to  $602,352  in  1913,  and 
$1,022,567  in  1914,  making  a  total  excess  in  maintenance 
(that  part  of  those  expenditures  devoted  to  improving  the 


212  EARNINGS 

property),  amounting  to  $2,672,212  in  1913  and  $3,976,732 
in  1914.  Crediting  net  operating  income  with  those  sums, 
we  find  the  net  operating  income  for  1913  to  be  $23,039,612 
and  1914,  $23,089,381. 

Further  deducting  from  book  value,  allowances  for 
betterments  and  improvements  built  out  of  surplus  earn- 
ings since  1906  amounting  to  $27,020,656  accumulated  to 
1913  and  $28,427,184  accumulated  to  1914 ;  the  percentage 
of  return  on  book  value  in  1913  is  7.75  and  in  1914,  7.10 — 
and  no  allowance  has  been  made  for  new  construction. 
The  allowances  for  improvements  charged  to  operating 
expenses  which  Mr.  Chambers  located,  constituted  only  a 
small  portion  of  the  total  charges  of  that  character,  for 
the  reasons  fully  stated  by  him. 

In  1914,  the  North  Western  Railroad  issued  $8,000,000 
General  Mortgage  Gold  maturing  in  1987,  the  net  proceeds 
above  all  commissions,  discounts  and  expenses  being 
$7,409,000.  The  yield  on  this  issue  was  4.4%.  It  will  be 
noted  that  that  yield  is  less  than  for  any  manufacturing, 
public  utility  or  other  industrial  security  issued  by  any 
New  York  or  Massachusetts  corporations,  recorded  in 
the  offices  of  the  public  commissions  of  those  states. 

The  same  year  the  North  Western  issued  Equipment 
Trust  Certificates  bearing  a  yield  of  5V?  %  this  security 
being  due  in  1923.  No  manufacturing,  industrial  or  public 
utility  security  were  we  able  to  find,  of  a  like  character, 
sold  during  the  same  period,  at  as  low  a  rate. 

CHICAGO,  BURLINGTON  &  QUINCY. 

Assuming  that  the  Northwestern  territory  directly  in- 
volved includes  Illinois,  Wisconsin,  Minnesota,  Iowa, 
North  Dakota,  South  Dakota  and  Nebraska,  the  Burling- 
ton is  very  representative.  72%  of  its  mileage  is  located 
in  those  states.  The  Burlington  was  selected  by  this  Com- 
mission in  the  1910  case  together  with  the  Santa  Fe  as 
representative  of  the  territory.     The    Burlington    was 


EARNINGS  213 

named  by  Mr.  Boyd  and  Mr.  Wettling  as  a  typical  road 
in  this  territory.  This  road  in  1913  earned  a  larger  per- 
centage of  net  operating  income  to  property  investment 
than  in  any  year  in  its  history,  so  far  as  our  record  goes. 

The  Burlington  Railroad  in  1913  earned  a  larger  per- 
centage on  capital  stock  than  any  other  year  in  its  his- 
tory. It  earned  the  largest  percentage  on  total  capital 
obligations  outstanding,  of  any  year  in  its  history.  The 
1913  dividends  of  the  Burlington  were  8%,  the  largest 
in  its  history.  The  accumulated  surplus  of  the  Burling- 
ton in  1913  amounted  to  $91,000,000,  being  the  largest  in 
its  history  excepting  1914. 

A  factor  that  makes  the  Chicago,  Burlington  & 
Quincy  a  very  good  index  of  earnings  under  present  rates 
in  this  territory,  is  that  the  property  investment  has 
had  a  gradual  growth  during  its  entire  period  since  1890, 
the  increase  for  no  year  being  as  much  as  10%,  with 
only  two  exceptions,  those  years  being  1899  and  1901; 
both  of  which  years  showed  a  slight  falling  off  in  ratio  of 
net  operating  income  to  property  investment.  The  divi- 
dend history  of  the  Chicago,  Burlington  &  Quincy  is  given 
in  the  following  tables : 


214 


EARNINGS 


CHICAGO,  BURLINGTON  &  QUINCY. 

Year 

Rate  of  dividend 
common 

Rate   of  interest 

1890    

4.50 
4.50 
4.75 
3.75 
5.00 

5.25 
4.00 
4.00 
5.50 
6.00 

6.00 
6.00 
7.00 
7.00 
7.00 

7.00 
7.00 
8.00 
8.00 
8.00 

8.00 
8.00 
8.00 
8.00 
8.00 

5.20 

1891    

5.03 

1892   

5.15 

1893   

5.21 

1894   

5.25 

1895   

5.17 

1896   

5.16 

1897   

5.22 

1898   

5.23 

1899   

5.15 

1900   

4.96 

1901   

5.06 

1902   

4.76 

1903  

4.77 

1904   

4.03 

1905    

4.33 

1906   

4.22 

1907   

4.33 

1908   

3.90 

1909  

3.90 

1910   

4.32 

1911   

4.05 

1912   

4.29 

1913   

4.33 

1914   

4.18 

The  annual  cash  return  to  the  investor  in  Burlington 
stocks  certainly  is  no  ground  for  demanding  increased 
freight  rates  as  evidenced  by  the  accompanying  table. 
Paying  a  dividend  in  1890  of  4%%  with  a  dividend  in  1914 
of  8%;  paying  interest  on  debt  in  1890  amounting  to 
5.20%  and  an  average  interest  in  1914  amounting  to 
4.18%,  there  is  little  ground  for  complaint,  dividends  go- 
ing up  and  interest  coming  down.  Last  year  the  Burling- 
ton earned  net  16%  on  its  capital  stock  outstanding  in 
the  hands  of  the  public. 


EARNINGS 


215 


The  accompanying  table  shows  the  tendencies  in  the  net 
revenues  of  the  Burlington.  It  will  be  noted  that  the  net 
operating  revenue  in  1913,  amounting  to  $31,500,000,  is 
over  100%  greater  than  in  1900;  200%  greater  than  in 
1890.  It  surpasses  any  previous  year  in  its  history.  In 
1914  the  net  operating  revenue  amounted  to  $30,000,000 
and  was  greater  than  any  other  year,  except  1913. 


CHICAGO,  BURLINGTON  &  QUINCY. 

Year 

Single 

track 

mileage 

operated 

Operating 
revenue 

Operating 
expenses 

Net 

Operating 

revenue 

Total 
Main- 
tenance 

1890  ... 

5,138.82 

$28,016,246 

$17,304,648 

$10,711,598 

$  6,553,611 

1891  ... 

5,284.27 

25,584,120 

16,288,833 

9,295,287 

5,656,794 

1892  ... 

5,440.74 

30,949,795 

19,633,653 

11,316,142 

8,028,025 

1893  ... 

5,556.21 

33,328,147 

21,545,502 

11,782,645 

8,479,377 

1894  ... 

5,595.58 

27,240,889 

16,863,331 

10,377,558 

6,377,344 

1895  ... 

5,731.82 

23,392,993 

14,541,485 

8,851,505 

5,051,079 

1896  ... 

5,870.48 

25,372,965 

15,798,860 

9,574,105 

6.402,314 

1897  ... 

5,859.70 

26,379,964 

15,495,833 

10,884,131 

5,838,700 

1898  ... 

5,859.70 

32,294,782 

19,352,514 

12,942,268 

9,004,801 

1899  ... 

6,230.93 

32,799,049 

19,317,492 

13,481,557 

8,420,727 

1900  ... 

6,412.48 

37,643,138 

23,119,092 

14,524,046 

10,939,912 

1901  ... 

7,789.46 

48,943,253 

31,269,527 

17,673,726 

14,572,018 

1902  ... 

7,971.13 

52,290,131 

32,365,094 

19,925,037 

14,892,009 

1903  ... 

8,306.75 

60,576,508 

36,063,619 

24,512,889 

16,541,682 

1904  ... 

8,326.16 

62,846,447 

39,442,050 

23,404,397 

18,025,741 

1905  ... 

8,561.64 

64,049,402 

39,496,209 

24,553,193 

18,541,341 

1906  ... 

8,677.02 

72,073,772 

48,321,472 

23,752,300 

24,573,701 

1907  ... 

8,875.07 

80,127,986 

55,847,189 

24,280,797 

28,861,322 

1908  ... 

9,023.65 

77,763,356 

55,162,492 

22,600,864 

26,423,338 

1909  ... 

9,020.82 

78,612,629 

54,560,998 

24,051,631 

26,353,188 

1910  ... 

9,039.97 

87,869,517 

63,010,965 

24,858,552 

30,782,627 

1911  ... 

9,074.84 

88,272,208 

59,541,926 

28,730,282 

27,167,416 

1912  ... 

9,074.10 

86,723,068 

60,646,949 

26,076,119 

27,835,063 

1913  ... 

9,128.51 

94,374,486 

62,842,891 

31,531,595 

28.669,078 

1914  ... 

9,263.86 

92,750,934 

62,148,398 

30,602,536 

27,891,314 

216 


EARNINGS 


CHICAGO,  BURLINGTON  &  QUINCY. 


Year 


Freight 

revenue 

including 

switching 


Revenue  ton 

miles  per 
mile  of  road 


Revenue 

tons  per 

train  mile 


1890 
1891 
1892 
1893 
1894 

1895 
1896 
1897 
1898 
1899 

1900 
1901 
1902 
1903 
1904 

1905 
1906 
1907 
1908 
1909 

1910 
1911 
1912 
1913 
1914 


$19,849,577 
16,821,990 
21,838,770 
22,882,126 
17,202,394 

15,116,642 
16,788,199 
18,658,355 
23,885,959 
23,094,178 

26,791,149 
33,680,811 
35,778,377 
42,520,433 
44,127,631 

43,708,570 
51,027,011 
56,222,393 
53,552,040 
53,205,659 

59,281,549 
59,123,311 
58,960,770 
65,390,931 
64,100,830 


$388,819 
311,442 
399,395 
429,206 
334,573 

291,779 
326,037 
336,628 
408,369 
401,570 

469,773 
496,997 
498,082 
586,702 
612,710 

606,070 
726,503 
801,666 
731,925 
733,930 

822,474 
784,149 
845,922 
963,074 
929,702 


$152.22 
129.50 
150.19 
155.00 
155.00 

150.00 
166.00 
163.84 
163.53 
180.01 

195.26 
200.43 
220.52 
271.24 
284.14 

322.27 
370.38 
394.06 
384.26 
387.44 

381.26 
406.33 
437.75 

483.83 
478.57 


EARNINGS  217 

A  very  striking  example  of  the  reconstruction  that 
has  been  going  on,  and  the  economies  that  have  effected  a 
revolution  in  railroading  among  representative  companies 
during  recent  years  is  given  in  the  following  extract  from 
one  of  the  annual  reports  of  the  Burlington  to  its  stock- 
holders : 

"The  Company  has,  in  the  past  years,  expended 
very  large  sums  in  the  reduction  of  grade  and  curva- 
ture, for  more  and  longer  side  and  passing  tracks, 
heavier  locomotives  and  larger  equipment,  whereby 
the  train  load  has  been  very  greatly  increased.  This 
is  to  be  seen  from  the  fact  that  in  1901  the  freight 
train  miles  (including  mixed)  were  19,314,987,  as 
against  17,554,338  in  1912,  or  a  decrease  of  9.1%. 
During  the  same  period  the  ton  miles  increased  from 
3,871,337,916  to  7,675,979,757,  or  an  increase  of 
98.3%.  In  other  words,  in  1912,  fully  twice  the  vol- 
ume of  freight  business  was  handled,  with  nearly 
10%  less  of  freight  train  miles  run  to  move  it."  (An- 
nual Eeport  to  Stockholders  of  the  Chicago,  Bur- 
lington &  Quincy,  1912.    Powell  Exhibit  1.) 

The  bonds  of  this  company  in  1914,  as  shown  on  page 
5  of  Norton  Exhibit  Volume  1,  were  sold  on  the  market 
at  a  yield  of  less  than  4^%,  being  less  than  the  yield  in 
1890  in  every  instance  save  one ;  in  that  case  it  was  the 
same.  There  has  been  an  increase  in  the  yield  on  the 
bonds  of  the  Burlington  since  1900,  the  average  being 
16.2%  as  compared  to  the  average  increase  in  government 
bonds  of  England,  France,  Germany  and  United  States  of 
17.67%,  and  as  compared  to  the  increase  in  the  bonds  of 
the  twenty  largest  cities  in  the  United  States,  of  31%, 
compared  to  Norton  pure  money  rate  of  25%.  The  in- 
crease in  the  yield  which  represents  the  decline  in  the 
price  of  the  bond  has  been  greater  than  the  average  on 
the  Northwestern  group  of  railroads.  The  actual  yield 
last  year  on  outstanding  issues  has  been  4.3%  which  is 
1-10  of  1%  less  than  the  average  for  the  Northwestern 
group  of  railroads.    New  issues  on  the  Burlington  in  1914 


218  EARNINGS 

aggregated  $6,000,000  par,  net  proceeds  being  $5,500,000 
at  a  price  of  91.7,  making  a  yield  of  4.4%.  This  sale  was 
of  the  general  mortgage  bond  due  in  1958.  That  yield 
was  the  same  as  new  issues  of  the  Chicago  &  Northwest- 
ern Eailroad  Company;  Chicago,  St.  Paul,  Minneapolis 
&  Omaha;  slightly  greater  than  the  refunding  bonds  of 
the  Great  Western  which,  of  course,  has  a  very  small  per- 
centage of  bonds  outstanding ;  slightly  less  than  the  Min- 
neapolis, St.  Paul  &  Ste.  Sault  Marie.  This  yield  of  4.4% 
was  less  than  any  one  of  the  25  issues  of  public  utilities 
and  industrials  in  New  York  and  Massachusetts  or  the 
United  States  Steel  Trust,  tabulated  on  sheets  number 
23  and  24  Norton  Exhibit  Volume  2,  and  that  yield  was 
less  than  any  of  the  public  utility  bonds  of  New  York 
State,  approved  by  the  Commission  of  the  first  or  second 
district,  or  by  the  Massachusetts  Commission,  during  the 
same  year  as  shown  on  pages  35  and  36  of  said  exhibit, 
there  being  129  of  these  issues  gathered  together,  com- 
prising all  the  issues  of  all  kinds  of  public  utilities  com- 
panies, water,  electric  light,  street  railway,  gas,  telephone, 
telegraph,  light,  power,  etc.,  which  these  three  commis- 
sions in  the  states  of  New  York  and  Massachusetts  have 
passed  upon  last  year. 

The  Burlington  road  has  a  credit  of  the  very  highest 
in  the  United  States.  The  Burlington  maintenance  ex- 
penditures have  averaged  per  locomotive  since  1910  over 
$3,000  per  engine,  surpassing  any  prior  period  in  its  his- 
tory. Likewise  its  maintenance  per  freight  car  during  the 
same  period  has  been  greater  than  any  other  period  in  its 
history.  Its  maintenance  per  mile  of  line  has  also  been 
greater. 

ATCHISON,  TOPEKA  &  SANTA  FE. 

The  accompanying  table  shows  the  tendency  of  operat- 
ing revenues  on  the  Santa  Fe  Railroad.  In  1913  we  find 
a  net  operating  revenue  of  $34,260,000,  which  was  over 


EARNINGS 


219 


100%  greater  than  in  1900,  and  300%  greater  than  in  1890. 
Net  operating  revenues  in  1913  were  greater  than  in  any 
preceding  year  of  its  history,  and  greater  in  1914  than  any 
other  year  excepting  the  year  1913. 

ATCHISON,  TOPEKA  &  SANTA  FE. 


Tear 

Single 

track 

mileage 

operated 

Operating 
revenues 

Operating 
expenses 

Net 

operating 

revenue 

Total 
main- 
tenance 

1890  ... 

4,582.19 

$20,839,294 

$12,808,473 

$  8,030,821 

$  4,681,633 

1891  ... 

4,582.12 

23,473,121 

15,401,641 

8,071,480 

5,538,326 

1892  ... 

4,582.12 

25,552,184 

16,113,776 

9,438,408 

6,103,875 

1893  ... 

4,582.12 

27,514,653 

17,313,671 

10,200,982 

6,439,184 

1894  ... 

4,582.12 

21,953,602 

15,581,692 

6,371,910 

5,806,950 

1895  ... 

4,582.12 

19,787,623 

15,096,210 

4,691,413 

5,960,360 

1896  ... 

4,528.16 

20,806,435 

14,878,646 

5,927,789 

6,508,082 

1897  ... 

4,542.76 

22,153,519 

15,431,905 

6,721,614 

7,312,751 

1898  ... 

4,564.73 

25,451,917 

16,481,118 

8,970,799 

7,741,047 

1899  ... 

4,687.81 

26,543,068 

16,293,082 

10,249,986 

7,308,094 

1900  ... 

4,806.00 

30,650,463 

17,000,221 

13,650,242 

7,613,183 

1901  ... 

4,817.54 

34,966,188 

18,023,443 

16,942,745 

7,651,186 

1902  ... 

4,843.61 

37,120,290 

19,341,274 

17,779,016 

8,239,461 

1903  ... 

4,871.34 

38,030,096 

22,067,497 

15,962,599 

10,256,684 

1904  ... 

5,030.74 

41,337,563 

24,599,055 

16,738,508 

11,235,345 

1905  ... 

5,043.30 

41,048,754 

26,515,256 

14,533,498 

13,182,485 

1906  ... 

5,043.30 

47,249,956 

29,072,761 

18,177,195 

14,002,612 

1907  ... 

6,928.30 

75,792,605 

45,749,246 

30,043,359 

21,987,351 

1908  ... 

7,101.62 

75,574,382 

47,974,888 

27,599,494 

22,864,748 

1909  ... 

7,458.47 

76,770,668 

45,381,887 

31,388,781 

21,497,508 

1910  ... 

7,459.85 

86,971,313 

55,945,465 

31,025,848 

26,952,299 

1911  ... 

7,549.69 

89,164,317 

56,637,494 

32,526,823 

26,716,252 

1912  ... 

8,200.86 

89,856,347 

57,666,316 

32,190,031 

26,978,994 

1913  ... 

8,237.55 

98,090,754 

63,830,683 

34,260,071 

31,557,139 

1914  ... 

8,339.72 

93,540,268 

60,172,701 

33,367,567 

28,830,821 

We  find  the  man  who  has  put  his  money  into  the  Santa 
Fe  Company  has  been  faring  better  in  recent  years  than 
formerly.  Coming  out  of  the  receivership  but  recently 
the  dividend  rate  in  1901  was  Sy2%.  There  has  been  a 
steady  increase  since  then  until  the  last  five  years  when 
it  has  been  6%  annually  on  the  common  stock,  and  5% 
annually  on  the  preferred  stock.  The  interest  rate  has 
shown  a  slight  increase  on  the  Santa   Fe,    1914   being 


220 


EARNINGS 


4.03%.    They  have  not  missed  their  interest,  or  passed  a 
dividend,  in  the  last  fifteen  years '  time. 


ATCHISON,  TOPEKA  &  SANTA  FE. 


Year 

Rate  of 
dividend, 
common 

Rate  of 
dividend, 
preferred 

Rate  of 
interest 

1890  

3.50 
4.00 
4.00 
4.00 

4.00 
4.50 
6.00 
5.00 
5.50 

6.00 
6.00 
6.00 
6.00 
6.00 

2.25 

4.00 
5.00 
5.00 
5.00 
5.00 

5.00 
5.00 
5.00 
5.00 
5.00 

5.00 
5.00 
5.00 
5.00 
5.00 

3.31 

1891  

3.38 

1892  

3.60 

1893  

3.60 

1894  

3.64 

1895  

3.88 

1896  

2.26 

1897  

2.70 

1898  

2.89 

1899  

2.85 

1900  

2.85 

1901  

3.99 

1902  

3.74 

1903  

3.98 

1904  

3.98 

1905  

3.94 

1906  

3.89 

1907  

4.12 

1908  

3.96 

1909  

4.34 

1910  

3.94 

1911  

3.84 

1912  

3.97 

1913 

4.24 

1914  

4.03 

Two  facts  of  striking  importance  stand  out  in  an  analy- 
sis of  this  property.  At  the  time  of  the  reorganization 
$102,000,000  fictitious  capitalization  was  issued,  as  testi- 
fied to  by  Mr.  Powell. 

At  the  same  time  the  book  value  or  property  invest- 
ment was  also  exaggerated  by  the  same  amount  of  money. 

The  second  fact  of  great  importance  is  the  enormous 
maintenance  charges  of  recent  years.  The  Santa  Fe 
expended  last  year  in  maintaining  its  locomotives  $4,189 


EARNINGS  221 

per  engine.  For  the  same  purpose  the  Burlington  ex- 
pended $3,243;  the  Great  Northern  $3,175;  the  North 
Western  $2,640.  The  Santa  Fe  expended  in  maintaining  its 
passenger  cars  during  the  same  year  $1,144 ;  $100  greater 
per  car  than  the  Burlington  and  twice  as  great  as  the 
North  Western.  The  Santa  Fe  expended  in  1914  in 
maintaining  its  freight  cars  $101  each,  or  20%  more  per 
car  than  was  expended  by  the  North  Western,  and  that 
was  the  highest  in  the  whole  history  of  the  North  Western, 
with  only  one  exception,  1907. 

If  the  Santa  Fe  has  figured  maintenance  in  1913  upon 
the  same  basis  as  the  North  Western  did  for  the  same 
year,  the  net  income  of  the  Santa  Fe  would  have  been 
$5,000,000  greater  than  it  was,  or  approximately  $35,700,- 
000.  But  there  was  $102,000,000  of  property  investment 
or  book  value  created  out  of  nothing  at  the  time  of  the 
reorganization.  Deducting  that  amount  from  the  book 
value  of  the  property  for  the  year  1913,  we  have  left 
$516,000,000 ;  but  this  sum  includes  $32,300,000  that  has 
been  expended  for  additions  and  betterments  charged 
to  surplus,  aside  from  other  sums  that  undoubtedly  exist, 
which  we  did  not  have  time  to  find.  This  company,  like 
all  others,  has  been  building  for  the  future.  During 
recent  years  its  book  value  has  increased  at  enormous 
strides,  over  $100,000,000  being  added  since  1907.  Mak- 
ing the  same  allowance  for  that  factor  which  Mr.  Com- 
missioner Harlan  did  in  the  Southwestern  case  of  1910, 
we  deduct  20%,  we  find  a  return  for  the  Santa  Fe  on  its 
property  investment  in  1913  amounting  to  over  9%  in- 
stead of  4.98%  as  indicated  by  its  books. 

The  Chicago,  Minneapolis  &  Omaha  is  not  an  independ- 
ent company.  It  is  a  part  of  the  North  Western  system, 
and  any  financial  analysis  of  this  company  by  itself  is 
subject  to  the  criticism  that  you  must  consider  system 
figures. 


222  EARNINGS 

Their  common  ownership  and  management  is  evidenced 
by  these  facts. 

The  following  officials,  as  shown  by  their  official  reports 
on  file  with  the  Commission,  have  the  same  position  in 
each  company: 

Wm.  A.  Gardner,  president;  Sah'l.  A.  Lynde,  vice- 
president  and  assistant  secretary;  Edward  M.  Hyzar, 
vice-president  and  general  counsel ;  W.  H.  Stennett,  audi- 
tor expenditures;  L.  S.  Carroll,  general  purchasing 
agent ;  L.  A.  Robinson,  comptroller ;  E.  E.  Betts,  superin- 
tendent transportation. 

The  executive  committee  of  the  C,  St.  P.,  M.  &  0.  has 
seven  members  and  five  of  the  seven  are  C.  &  N.  W.  offi- 
cials. The  C,  St.  P.,  M.  &  0.  has  thirteen  directors,  and 
nine  of  the  thirteen  are  C.  &  N.  W.  officials. 

In  Commercial  Club  of  Superior  v.  G.  N.  Ry.  Co.,  24 
I.  C.  C,  at  page  120,  this  Commission  held  that  the  C.  & 
N.  W.  and  the  C,  St.  P.,  M.  &  0.  should  be  considered 
one  system,  for  the  purpose  of  computing  distances. 

President  Felton  of  the  Great  Western  is  the  only 
executive  official  of  any  of  the  Northwestern  group  of 
railroads  who  took  the  stand.  The  Great  Western  is  one 
of  the  weak  sisters  in  this  territory.  It  is  so  weak  in 
character  ana»unrepresentative  that  the  president  him- 
self admitted  that  it  was  not  typical,  on  cross  examina- 
tion. 

The  Great  Western  is  so  unrepresentative  in  character 
that  it  is  difficult  to  discover  a  mention  of  it  in  the  West- 
ern Advance  Rate  Case  of  1910.  The  Great  Western  was 
earning  less  than  2%  on  its  property  in  1910.  Neverthe- 
less the  Commission  denied  an  advance  in  this  territory. 
There  are  people  who  earn  less  than  2%  in  the  grocery 
business,  hardware  business  and  in  all  kinds  of  manufac- 
turing and  industrial  pursuits,  from  one  end  of  the  coun- 
try to  the  other.     There  are  people  who  earn  less  than 


EARNINGS  223 

2%  in  the  oil  business;  yet  most  of  us  are  willing  to  con- 
cede that  the  oil  industry  as  a  whole  is  profitable.  Cer- 
tainly, this  Commission  will  never  set  up  the  Great  West- 
ern as  a  standard  to  test  the  adequacy  of  the  rates  in  this 
territory.  The  Great  Western  is  better  today,  physical- 
ly and  financially,  than  it  was  in  1909  or  1910.  The  presi- 
dent of  the  road  frankly  conceded  this,  as  stated  else- 
where in  the  brief.  It  will  be  noted  that  it  has  been  able 
to  maintain  its  property  since  1909  on  a  higher  basis 
than  ever  before;  maintenance  per  mile  of  line  being 
greater ;  maintenance  per  engine  being  fully  50%  greater 
than  for  any  preceding  period  of  like  duration ;  mainte- 
nance per  freight  car  being  much  higher  than  for  any 
preceding  period.  In  earlier  years  there  were  times 
when  it  earned  slightly  more  on  property  than  the  last 
two  years.  For  instance,  in  1906  it  earned  2y2%,  but 
turning  over  to  the  maintenance  column  it  will  be  noted 
that  this  maintenance  last  year  was  72%  greater  per  loco- 
motive, and  the  maintenance  per  freight  car  was  over 
100%  greater,  as  well  as  the  maintenance  per  passenger 
coach. 

This  company  has  not  only  been  able  to  maintain  its 
property  during  recent  years  at  a  standard  equal  to  other 
representative  carriers  in  the  territory;  but  it  has  been 
able  also  to  borrow  money  at  as  favorable  a  rate  as  any 
other  railroad  in  this  territory.  The  Great  Western  Rail- 
road is  chiefly  a  main  line  proposition  joining  the  termi- 
nals of  Omaha,  St.  Paul  and  Chicago,  that  were  already 
served  with  a  veritable  network  of  main  lines  and  feed- 
ers belonging  to  other  companies.  Any  time  table  of  this 
railroad  will  show  that  situation.  ^ .       - 

It  isjan  axiom  in  modern  railroading  that  a  torritlry     *r 
must  Qoniainboth  main  line  connections  with  great  ter- 
minals, and  a  system  of  feeders,  in  order  to  successfully 
meet  the  competition  of  other  railroad  systems  in  the  ter- 
ritory.    There  is  hardly  one  railroad  in  the  United  States 


224  EARNINGS 

that  is  successful,  which  is  a  main  line  proposition,  with- 
out a  large  per  cent  of  feeders,  or  unless  it  is  a  part  of  a 
system  connecting  terminals,  which  also  has  a  large  per 
cent  of  feeders.  There  may  be  a  few  exceptions  here  and 
there,  to  the  foregoing  rule  which  we  have  stated,  but 
they  are  very  rare,  and  because  of  peculiar  circumstances. 

The  Great  Western  has  wholly  failed  to  meet  these  re- 
quirements. 

Concerning  his  property,  the  president  of  the  Great 
Western  testified: 

"Mr.  Thorne:  Mr.  Felton,  I  understand  you  to 
take  the  position  that  it  was  not  fair  to  consider  the 
weak  line  or  the  strong  line,  but  the  average  line  or 
typical  line,  in  order  to  determine  the  adequacy  of 
railroad  revenues,  is  that  correct  ? 

' '  Mr.  Felton :    Yes,  sir. 
.  "Mr.   Thorne:    Would   you   consider   the   Great 
Western  a  typical  line  or  average  line  in  this  terri- 
tory? 

"Mr.  Felton:  No,  sir,  I  would  not  say  the  Great 
Western  was  an  average  line.  The  Great  Western 
is  below  the  average  in  its  returns. 

"Mr.  Thorne:  The  Great  Western  was  a  party 
to  the  proceeding  in  1910,  was  it  not,  to  secure  an 
advance  in  rates  ? 

1 '  Mr.  Felton :    Yes,  sir. 

"Mr.  Thorne :  And  the  Commission  held  the  reve- 
nues at  that  time  were  adequate  f 

"Mr.  Felton:  As  far  as  the  roads  as  a  whole  were 
concerned. 

1 '  Mr.  Thorne :  Well,  do  you  consider  that  a  proper 
basis  upon  which  to  reach  a  conclusion? 

"Mr.  Felton:  I  think  that  is  the  basis  on  which 
the  Commission  have  always  acted,  I  believe."  (tr. 
194-195.) 

The  Chicago,  Milwaukee  &  St.  Paul  Railway  Company 
has  had  an  unfortunate  history,  with  which  the  Commis- 
sion is  guite  familiar.    They  have  repeatedly  violated  the 


EARNINGS  225 

rules  of  the  Commission  in  the  keeping  of  their  account. 
The  Commission  has  already  had  occasion  to  discuss  some 
examples  of  that  character. 

During  the  past  seven-year  period,  upon  which  Mr. 
Wright  and  his  associates  are  laying  so  much  stress,  we 
find  the  property  investment  of  the  Milwaukee  has  in- 
creased enormously.  The  property  investment  has  in- 
creased 100%  since  the  1910  decision.  As  to  the  character 
and  wisdom  of  that  investment,  the  operating  and  finan- 
cial results  of  this  carrier  speak  for  themselves.  As  to 
whether  the  public  shall  be  compelled  to  stand  the  loss,  or 
whether  the  owners  of  the  property  shall  pay  that  loss,  is 
an  important  question  which  can  only  be  decided  one  way 
if  it  is  decided  right,  and  in  harmony  with  former  deci- 
sions of  this  Commission  and  the  courts. 

During  this  period  when  the  Puget  Sound  has  been 
largely  constructed  and  improved,  the  operating  accounts 
have  been  intermingled  as  well  as  the  revenue  accounts, 
in  the  same  manner  that  always  becomes  possible  in  con- 
nection with  parent  and  subsidiary  companies,  or  com- 
panies having  intercorporate  relations. 

This  company  has  included  in  its  property  investment, 
improvements  and  betterments  built  out  of  operating  ex- 
penses and  surplus  earnings  for  many  years.  The  1906 
report  of  this  company  to  its  stockholders,  shows  on  page 
24  the  following  entry: 

Earnings  and  other  income  expended  for 

additions  and  improvements  to  property  $25,617,015.81 ; 

Over  $7,000,000  of  that  sum  being  expended  out  of  ac- 
cumulated surplus  earnings  which  they  had  on  hand  that 
year,  1906. 

Last  year  this  company  had  an  accumulated  surplus  of 
over  $43,000,000.  It  should  have  been  over  $50,000,000, 
and  greater  than  any  other  year  in  the  history  of  the 
company,  if  their  accounts  had  been  correctly  kept  during 


226  EARNINGS 

recent  years.  We  call  your  particular  attention  to  the 
annual  report  to  the  stockholders  for  the  year  1911.  On 
page  17  you  will  find  the  following  entry: 

Discount,  Commission  and  expenses 
$25,000,000  debenture  bonds  of  1909 
and  15-year  European  loan  of  1910  $7,768,201.33 

In  the  annual  report  to  stockholders  for  the  year  1913, 
on  page  25  we  find  the  following  entry: 

Discount  on  General  Mortgage  4^% 
bonds  and  Extension  Milwaukee  & 
Northern  Railroad  Co.  4y2%  bonds  $1,393,704.65 

(It  will  be  noted  on  the  same  page  there  is  a  debit  charge 
to  profit  and  loss  by  reason  of  the  acquisition  of  the  ac- 
counts of  the  Puget  Sound  Railway  or  $1,816,439.00.) 

In  the  annual  report  to  stockholders  in  1914  you  will 
find  the  following  entry  on  page  25 : 

Discount  on  General  Mortgage  and 

General  and  Refunding  Mortagage  bonds  $898,646.00 

(It  will  be  noted  on  this  same  page  there  is  an  Adjust- 
ment by  reason  of  the  acquisition  of  the  accounts  of  the 
Puget  Sound  amounting  to  over  a  million  dollars.  In 
those  three  years,  1911,  1913,  1914,  we  find  discounts 
aggregating  over  ten  million  dollars  charged  to  profit  and 
loss  the  year  they  occur  instead  of  being  spread  over  the 
life  of  the  bonds.) 

The  custom  of  carriers  of  charging  to  renewals  and  de- 
preciation, the  cost  of  equipment  retired  and  still  keeping 
that  equipment  in  service,  is  proved  by  the  entry  in 
the  annual  report  to  the  stockholders,  1912,  on  page  33: 

"These  locomotives  and  cars,  dropped  from  in- 
ventory when  their  replacement  was  provided  for 
by  charges  to  Income  Account  prior  to  July  1st, 
1907,  are  still  in  use,  chiefly  in  train  work  and  con- 
struction service.  It  is  therefore  necessary  to  re- 
instate them  in  the  accounts  and  in  the  inventory  of 
equipment.     The  difference  between  their  original 


EARNINGS  227 

cost  and  their  scrap  value  has  been  credited  to  ' '  Re- 
serve for  Accrued  Depreciation, ' '  and  when  they  are 
destroyed  or  taken  down  no  further  charge  to  Oper- 
ating Expenses  or  Income  Account  will  be  neces- 
sary. '  ■ 

On  this  page  we  see  this  company  has  put  into  property 
investment  the  total  cost  new  of  60  locomotives  and  2,751 
cars  without  any  deduction  whatever  for  depreciation,  al- 
though they  had  been  written  out  of  service  over  five 
years  ago.  (The  details  of  this  equipment  and  these  facts 
are  given  on  page  9  of  the  same  report.) 

Another  fact  of  significance  is  that  this  company  in- 
creases its  reserve  for  accrued  depreciation  almost  100% 
in  one  year,  this  being  shown  on  top  of  page  11  in  1912 
report  to  stockholders,  where  it  is  stated, ' '  At  the  close  of 
the  fiscal  year  ending  June  30th,  1911,  there  was  at  the 
credit  of  Reserve  for  Accrued  Depreciation  the  sum  of 
$2,975,310.57."  On  the  same  page  it  is  stated  that  the 
balance  of  this  account  June  30th,  1912,  is  $5,350,000. 

Another  fact  worthy  of  note  is  that  the  operating  rev- 
enues of  this  company  in  1912  declined  $1,800,000,  but  in 
spite  of  that  fact,  this  company  increased  its  maintenance 
by  about  $1,700,000.  The  maintenance  in  1911  was  the 
largest  in  the  history  of  this  company,  both  in  gross  and 
in  per  cent  of  gross  revenues  (so  far  as  our  record  shows) 
with  only  one  exception.  That  was  for  the  year  1900.  If 
this  company  had  been  content  to  maintain  the  same  per- 
centage of  gross  revenue  for  its  maintenance  accounts  in 
the  year  1912  as  it  did  in  1911,  which  was  4Ss  peak  year 
in  the  history  of  the  company,  being  one  of  the  two  high- 
est since  the  organization  of  the  Interstate  Commerce 
Commission,  the  net  operating  income  of  the  Milwaukee 
for  1912  would  have  been  $15,975,513. 

If  during  the  year  1912  this  company  had  maintained 
the  same  average  rate  of  maintenance  to  property  invest- 
ment as  existed  during  the  seven-year  period  used  as  the 
basis  of  Mr.  Wettling's  exhibit,  from  1901  to  1907,  its 


228  EARNINGS 

maintenance   for    the    year    1912    would    have    been 
$13,760,076. 

Then  if  we  take  the  property  investment  as  of  1912, 
excluding  betterments  and  improvements  out  of  surplus 
earnings,  we  will  have  a  rate  that  compares  very  favor- 
ably to  preceding  years.  The  betterments  and  improve- 
ments as  stated  above,  built  out  of  earnings  and  income  up 
to  1906,  amount  to  $25,617,000,  which  was  formerly 
$5,000,000  less  than  the  accumulated  surplus  brought  for- 
ward for  the  year  1906. 

In  the  year  1911  we  have  the  unwarranted  decrease  in 
the  accumulated  surplus  of  over  $7,000,000;  because  the 
discount  on  bonds  which  should  have  been  spread  over 
the  life  of  the  bonds ;  but  taking  the  accumulated  surplus 
brought  forward  as  it  is  shown  on  the  books  for  the  year 
1912,  amounting  to  $49,000,000,  and  then  subtracting  the 
$5,000,000  excess  which  we  have  found  to  exist  in  1906, 
it  is  probably  fair  to  assume  that  the  resulting  figure, 
$44,000,000  represents  the  betterments  and  improvements 
that  had  been  built  out  of  surplus  or  earnings.  Subtract- 
ing that  from  the  property  investment  as  of  1912,  amount- 
ing to  $294,000,000,  we  have  a  resulting  property  invest- 
ment of  $250,000,000.  Divide  that  into  operating  income. 
Placing  the  maintenance  on  the  1911  basis  or  placing  the 
maintenance  in  1912  upon  the  average  percentage  of  the 
property  investment  which  existed  in  the  seven-year 
period  1901  to  1907  inclusive,  we  find  a  rate  of  return  on 
book  value  for  1912  which  compares  very  favorably  with 
those  of  preceding  years,  notwithstanding  the  fact  that 
1912  was  a  poor  year  on  the  Milwaukee,  their  operating 
revenues  declining  more  than  $2,000,000,  compared  with 
the  preceding  year.  It  is  true  the  operating  revenues  are 
greater  than  in  former  years ;  but  it  is  also  true  that  book 
value  we  have  adopted  also  exceeds  that  of  former  years, 
excluding  all  betterments  and  improvements  out  of 
surplus. 


EARNINGS  229 

The  Commission  itself,  in  the  1910  case,  made  a  some- 
what extended  analysis  of  the  Milwaukee 's  operating  sta- 
tistics and  of  the  unreliability  of  the  same,  reaching  the 
following  conclusion : 

"An  examination  of  the  exhibits  furnished  by  the 
Milwaukee  road  satisfies  us  that  we  must  arrive  at 
either  one  of  two  conclusions:  (1)  That  the  road  is 
not  as  efficiently  managed  as  others — a  view  which  we 
decline  to  accept;  or  (2)  that  its  tables  do  fully 
reveal  their  own  significance."  (Western  Advance 
Rate  Case  1910, 20  I.  C.  C,  307-367.) 

Again  the  Commission  had  occasion  to  criticise  the 
operating  reports  of  this  company  in  a  recent  investiga- 
tion. In  view  of  the  remarkable  discrepancies  both  in 
operating  reports  and  operating  policy,  and  in  view  of 
the  bad  judgment  evidently  displayed  in  the  purchase  of 
the  Puget  Sound,  we  feel  justified  in  adopting  either 
one  or  two  alternatives  stated  by  this  Commission  in  its 
1910  decision  as  to  this  company,  and  claim  that  it  cannot 
be  adopted  as  representative  or  typical. 

While  the  property  investment  figures  and  the  operat- 
ing statistics  have  been  subject  to  the  foregoing  variable 
conditions,  we  find  a  separation  of  the  actual  stocks  and 
bonds  outstanding  in  the  hands  of  the  public  and  the 
return  thereon  separated  from  the  computations  of  re- 
turns received  from  the  Puget  Sound,  as  well  as  the 
securities  issued  for  the  purchase  and  the  construction  of 
the  said  Puget  Sound,  leaves  a  very  handsome  condition 
for  the  Milwaukee  in  recent  years.  It  has  been  able  to 
meet  its  operating  expenses,  pay  its  taxes,  interest  on 
bonds  and  debt  and  have  a  net  corporate  income  which  is 
very  large  and  substantial  and  fully  complies  with  the 
test  this  Commission  laid  down  in  its  Advance  Rate  Case 
of  1910. 

As  to  the  Minneapolis  &  St.  Louis  and  Iowa  Central 
lines,  we  find  nothing  whatever  in  this  record  to  justify 


230  EARNINGS 

a  different  finding  than  the  one  stated  by  this  Commission 
in  its  decision  in  the  Western  Advance  Rate  Case  of 
1910,  20 1.  C.  C,  307,  377. 

Of  the  traffic  handled  by  the  Northwestern  group  of 
railroads,  86%  is  handled  by  the  Burlington,  Milwaukee, 
North  Western,  Great  Northern,  Northern  Pacific  and 
Union  Pacific.  If  you  exclude  the  last  three  railroad  just 
named  from  the  Northwestern  group,  in  that  case,  the 
three  railroads — the  Burlington,  Milwaukee  and  North 
Western — handled  78%  of  the  traffic  handled  by  the 
Northwestern  group  of  railroads. 


INVESTORS  IN  WESTERN  RAILWAY  SECURITIES,  AS  A  WHOLE, 
HAVE  BEEN  EARNING  ADEQUATE  RETURNS. 

(Prouty  Test.) 

The  relation  between  net  corporate  income  and  capital 
stock  practically  dictates  the  credit  of  a  company.  It  is 
well  for  the  Commission  to  consider  these  factors.  That 
relation  has  more  effect  than  any  other  item  in  the  ac- 
counting records,  to  determine  the  attractiveness  of 
railway  securities. 

The  main  proposition,  in  so  far  as  railway  credit  is  con- 
cerned, is  to  make  the  securities  attractive  to  investors. 
For  these  reasons  we  believe  serious  consideration  should 
be  given  to  these  factors.  We  will  do  so,  and  we  will  con- 
sider each  of  the  other  methods  that  have  been  used 
by  the  Commission  to  consider  the  adequacy  of  rates. 

The  public  is  entitled  to  demand  of  our  railroad  com- 
panies that  they  shall  meet  the  reasonable  legitimate  re- 
quirements of  modern  finance  and  operation;  and  upon 
their  failure  to  so  do,  they  are  not  entitled  to  the  return 
received  by  those  companies  which  do  meet  those  require- 
ments. What  is  reasonable  for  one  is  not  reasonable  for 
the  other.  You  are  not  dealing  with  an  imaginary  person 
who  owns  a  whole  railroad  system ;  you  are  dealing  in  a 
practical,  concrete  way  with  people  who  have  invested 
their  funds  in  railroad  stocks  and  railroad  bonds,  who 
are  demanding  more  money  from  the  public.  This  Com- 
mission today  cannot  dictate  how  a  company  shall  be 
capitalized,  any  more  than  it  can  dictate  how  or  where 
a  railroad  shall  be  constructed  or  operated,  except  that 
it  shall  be  reasonably  safe.  But  this  Commission  can  de- 
termine whether  a  company  is  entitled  to  larger  earnings 


232  RETURN  ON  CAPITAL 

for  its  present  services;  and  in  determining  that  issue 
you  can  and  should  take  into  consideration  how  a  com- 
pany is  capitalized,  how  it  is  located  and  constructed,  and 
how  it  is  operated.  A  company  failing  to  meet  the 
reasonable  requirements  of  modern  management  in  fi- 
nance or  operation,  is  not  entitled  to  the  same  amount  of 
return  as  a  company  which  does  meet  those  requirements, 
and  the  former  company  should  not  be  accepted  by  this 
Commission  as  a  standard  to  test  the  adequacy  of  rates. 

In  the  Eastern  Advance  Eate  Case  of  1910  the  Com- 
mission found  that  the  Baltimore  &  Ohio  was  able  to 
earn  above  fixed  charges,  including  interest  on  debt,  and 
dividends  on  preferred  stock,  7y2%  on  all  its  outstanding 
common  stock,  and  this  was  held  to  be  adequate.  This 
percentage  varies  slightly  with  the  proportion  of  com- 
mon stock  to  the  total  capitalization.  In  view  of  that 
fact  it  should  be  noted  that  the  percentage  of  common 
stock  to  total  capitalization  of  the  Balitmore  &  Ohio  in 
1910  amounted  to  approximately  27%%,  using  the  figures 
given  in  the  reports  of  the  Commission. 

The  exact  language  of  the  Commission  will  be  here 
produced : 

' 'We  express,  however,  no  opinion  as  to  the  rela- 
tion between  the  value  and  the  capitalization  of  this 
property.  We  accept  for  the  purposes  of  this  investi- 
gation that  Capital  account  as  we  find  it,  and  cer- 
tainly the  stockholders  of  the  Baltimore  &  Ohio  R. 
R.  Company  cannot  claim  upon  this  record  that  this 
property  should  be  allowed  to  make  earnings  in  ex- 
cess of  what  would  yield  a  fair  return  upon  that 
basis. 

1 '  It  should  be  noted  that  the  dividend  upon  the  pre- 
ferred stock,  $59,000,000  is  virtually  a  fixed  charge 
and  ought  not  properly  to  be  accounted  as  part  of  the 
dividends  paid.  To  every  practical  intent  it  is  a 
portion  of  the  underlying  liability  which  must  be 
taken  care  of  before  the  common  stock  receives  any 
return."    (20  I.  C.  C,  288.) 


RETURN  ON  CAPITAL  233 

"If  this  Company  is  to  preserve  its  financial  in- 
tegrity upon  the  basis  of  its  present  capitalization 
and  maintain  its  credit,  it  is  probable  that  it  must 
be  allowed  to  earn  a  sufficient  amount  to  pay  its 
interests,  its  preferred  dividends,  a  dividend  upon  its 
common  stock,  and  have  remaining  a  substantial 
surplus.  The  credit  of  the  Company  cannot  be 
maintained  for  year  after  year  upon  any  other  basis. 
•  We  are  of  the  opinion  that  the  sum  remaining  after 
the  payment  of  fixed  charges,  including  as  a  fixed 
charge  the  dividend  upon  the  preferred  stock,  should 
be  equivalent  to  between  7  and  8%  upon  the  common 
stock.  It  should  have  sufficient  earnings  so  that  it 
may  pay  a  dividend  of  5%  upon  its  common  stock 
and  carry  2>4%  to  surplus  or  pay  6%  upon  its  com- 
mon stock  and  carry  1>4%  to  surplus.  This  is  upon 
the  assumption  that  the  capitalization  does  not  ex- 
ceed its  actual  value."     (Id.  288.) 

In  making  practical  application  of  the  foregoing  basis, 
we  will  not  deduct  other  income  from  the  net  corporate 
income  of  the  carriers ;  this  is  for  the  same  reason  as  that 
expressed  by  Commisioner  Prouty  in  the  case  just  cited. 
When  considering  the  Pennsylvania  railroad,  he  stated: 

"But  the  Pennsylvania  Railroad  Company  is  not 
merely  a  Railroad  Operator — it  is  a  great  stockhold- 
ing corporation.  It  holds  for  example  the  entire 
stock  of  the  Pennsylvania  Company  which  controls 
the  Pennsylvania  Lines  west  of  Pittsburgh,  that  stock 
now  being  $80,000,000.  The  total  amount  of  its  hold- 
ings of  securities  outside  of  those  held  in  sinking  and 
other  funds,  according  to  its  report  to  this  Commis- 
sion for  the  year  ending  June  30,  1910,  amounted  to 
a  par  value  of  $352,933,730.  Upon  these  various  se- 
curities and  from  other  sources  it  had,  during  the  year 
1910,  an  income  of  substantially  $17,000,000.  Presum- 
ably its  capitalization  must  to  a  considerable  extent 
have  been  created  for  the  purpose  of  acquiring  these 
stocks  and  bonds,  and  since  no  detail  is  furnished  us 
showing  to  what  extent  the  capitalization  does  rep- 
resent the  Railroad  property  and  to  what  extent  the 
other  properties  of  this  Company,  it  is  fair  to  con- 


234  RETURN  ON  CAPITAL 

sider  in  this  connection  its  income  from  all  sources 
in  considering  its  ability  to  pay  dividends  upon  its 
stock."    (Id.  292.) 

The  states  primarily  concerned  in  this  proceeding  are 
as  follows:  Minnesota,  South  Dakota,  North  Dakota, 
Wisconsin,  Iowa,  Nebraska,  Kansas,  Missouri,  Arkansas, 
Louisiana,  Oklahoma  and  Texas.  As  previously  stated, 
the  Supreme  Court  of  the  United  States  has  frequently 
had  occasion  to  consider  the  adequacy  of  revenues  of  all 
the  roads  in  a  given  state,  or  of  representative  railroads 
in  a  given  state. 

Applying  the  Prouty  process  to  the  railroads  serving 
the  states  named,  we  find  that  all  the  railroads  in  each 
of  those  states  have  had  revenues  sufficient  to  pay  all  their 
operating  expenses,  all  their  taxes,  all  their  interest  on 
bonds,  dividends  on  preferred  stock;  and  they  have  had 
enough  left  over  to  equal  the  percentages  on  all  their  com- 
mon stock  outstanding  in  the  hands  of  the  public  as  is  in- 
dicated in  the  following  tables.  In  these  computations 
we  have  used  all  of  the  roads,  the  rich  and  the  poor,  with- 
out any  selection,  that  touch  the  states  in  any  manner, 
except  roads  having  operating  revenues  amounting  to  less 
than  $1,000,000,  because  they  are  not  finally  reported  as 
yet  by  the  Interstate  Commerce  Commission  for  the  last 
two  years,  the  only  figures  available  being  those  given  in 
the  preliminary  abstract  of  the  Commission.  However, 
this  does  not  affect  the  validity  of  the  showing  as  truly 
comprehensive,  and  representative  of  the  territory  in- 
volved; because  the  roads  earning  $1,000,000  or  more 
handled  over  98%  of  the  traffic  in  the  Western  Classifica- 
tion Territory  during  the  last  year,  this  figure  could  be 
arrived  at,  that  being  the  year  1912. 


RETURN  ON  CAPITAL 


235 


RETURN  ON  COMMON  STOCK  OF  ALL  RAILROADS  OPERATING 
IN  STATES  NAMED. 


States 

1911 

1912 

1913 

1914 

South  Dakota  

8.93 
8.81 
7.95 

15.10 
8.76 

18.30 

14.52 
4.94 
3.49 
3.46 
5.58 
2.03 

8.31 
7.97 
8.14 
8.55 
8.49 
8.34 

6.50 
4.11 
2.07 
3.05 
4.42 
1.45 

11.52 
10.53 
10.48 
10.92 
11.14 
10.91 

8.47 
6.59 
3.16 
3.81 
5.47 
1.50 

8.86 

Minnesota    

8.28 

North  Dakota  

8.66 

Iowa   

9.06 

9.31 

8.97 

Kansas    

6.64 

Missouri  

4.66 

0.94 

Louisiana  

1.74 

Oklahoma  

3.20 

Texas  

D1.41 

D — Indicates  figures  in  red. 

Authority:  Statistical  Reports  of  the  Interstate  Commerce  Com- 
mission.   Tables,  page  20,  Chambers  Exhibit  1. 

When  Mr.  Chambers  was  first  on  the  stand,  objection 
was  made  on  cross-examination  to  this  table  on  the 
ground  that  it  included  a  road  that  only  had  10  or  12 
miles  in  a  state,  specific  reference  being  made  to  North 
Dakota  and  the  North  Western  Railway. 

In  order  to  eliminate  every  objection  of  that  character, 
Mr.  Chambers  then  compiled  this  table  again,  eliminating 
all  railroads  operating  less  than  100  miles  in  any  of  the 
states.  This  computation  produced  the  following  results, 
and  it  will  be  noticed  that  there  is  very  little  change  in 
the  situation  as  a  whole: 


236 


RETURN  ON  CAPITAL 


RETURN  ON  COMMON  STOCK  OF  ALL  RAILROADS  (OPERATING 

100  MILES  OR  MORE  OF  ROAD  IN  EACH  STATE  NAMED) 

WHOSE  ANNUAL  OPERATING  REVENUES  EXCEED 

$1,000,000. 


1911 

1912 

1913 

1914 

9.31 
8.19 
7.84 
8.31 
8.90 
18.30 

16.14 
5.54 

3.92 
5.54 
1.51 

8.55 
7.58 
8.31 
6.22 
8.00 
8.34 

7.42 
4.76 

3.26 
4.36 
0.84 

12.15 
9.91 
10.57 
10.26 
11.21 
10.91 

9.31 
7.26 

3.80 
5.47 
0.77 

10.05 

7.63 

8.78 

8.16 

9.68 

8.97 

7.33 

5.23 

Louisiana  

2.51 

3.20 

D  2.56 

D — Indicates  deficit. 

Authority:  Statistical  Reports  of  the  Interstate  Commerce  Com- 
mission. 

These  facts  were  testified  to  on  transcript,  page  13585. 

It  will  be  noticed  that  all  of  the  Northwestern  group  of 
states  more  than  fulfill  the  requirements  laid  down  by  the 
Prouty  test.  This  is  not  true  of  the  Southwestern  group 
of  states,  if  you  disregard  that  part  of  Mr.  Commissioner 
Prouty 's  discussion  where  he  states,  "This  is  upon  the 
assumption  that  the  capitalization  does  not  exceed  its 
actual  value. ' '  This  record  shows  that  assumption  is  not 
true  as  to  the  Southwestern  group. 

Further  we  have  offered  very  substantial  evidence  that 
capitalization  in  the  Northwestern  group  of  states  is  ex- 
cessive (and  in  those  states  the  railroads  more  than  fulfill 
their  requirements,  notwithstanding  that  fact).  We  did 
not  have  opportunity  nor  facilities  to  make  an  extended 
investigation  and  analysis  of  the  Southwestern  railroads, 
except  as  shown  by  our  preliminary  survey,  given  in  Mr. 
Powell 's  Exhibit  No.  2,  which  should  be  supplemented  by 
a  critical  analysis  of  representative  carriers  in  that  terri- 
tory. 


RETURN  ON  CAPITAL 


237 


®s 

Mt-!et-»Nia» 

PS 

•^> 

09 

<e 

caio 

0 

us 

M«2 

HlAOlHOrtHMt'O 

M 

N 

0909 

(71 

CO 

3-°  £ 

Site 

■»9>i-iootopsooc-e9oo 

MJ 

i-J 

r^ 

=    ■" 

a 

d 

pso«ousoo-**'**'9it— ^« 

•<r 

«H 

-r 

t-u: 

«e 

T-t 

oonaoAHt-miaMN 

■ 

?i 

CJt- 

01 

t«^<  o 

0*0«C-        MulMtt 

X 

JO 

-*•  — 

a 

ps\-*d     t-<     V»h>-TV 

t-- 

t- 

PS*« 

t- 

»H         09        i-t        C9C9CO 

:-i 

^ 

pj 

«*■       Q 

1-1 

Ml 

•» 

03                   « 

«o     us 

tH 

tH 

00 

0) 

ilvldend 
on  Pre- 
ferred 
which 
hould  b 
paid 

u»     t— 

ro 

CO 

00 

00        00 

1- 

t- 

te 

P! 

d     us 

«o 

« 

9 

<0 

*r      os 

n 

CO 

■ 

PS 

«e     jm 

Cl 

CJS 

CO 

P! 

i-T 

»- 

OS 

O            » 

M 

M 

V. 

•a 

M 

■ 

o<s          CO              ooo 

t- 

t- 

t- 

■O  ' 

ot-          co              ^r  co 

GC 

oc 

00 

den 
Pre 
rred 
ock 
aid 

»9>             09                   t~09 

«-<*t-*         us"             i-toa* 

oc 

00 

gsco         ri             oooo 

10 

lt: 

u: 

■>c«oaft 
5° 

t- t-          i-t_             e»  oo 

10 

L.0 

HJ 

«-t             oo"             eo 

M 

10 

us 

|H 

— 

m 

m 

-. 

m 

v. 

• 

m  i 

psps<C9Ji-it-usooi-*»-i 

*l 

t- 

m 

e»co 

«e 

■«< 

IO 

C» 

M 

09  rH 

99 

■* 

ooiHoaii«4nt>oe 

00 

m 

ot 

OrH 

C71 

9* 

lOooteianoVoioit-" 

a 

o- 

l>l£ 

«Oo 

(•t»w«(ot-u:uiCO 

r" 

o>t- 

<r 

z«8 

»no«»ncocNu) 

M 

Pi 

-.  1  " 

oc 

n  c 

Vofor-Tos      ■«t"i-"u-s"lO 

US 

1- 

co« 

us 

Oi-t 

r-«       09       .H       :i:i:: 

* 

-r 

M 

o 

1H 

rH 

^H 

•» 

•S 

V 

»» 

<n 

9»toocooo«eooo 

•<* 

090 

«e 

«»OH0N»O0O 

t- 

t. 

090 

91 

c  c*j 

ONriaioteovaoo 

O 

O 

PSO- 

■ 

o-o0 

t-^«o"o»w«oioo*i,"co5© 

«c 

«C 

09t- 

10 

e  y'O.Q 

G0C3 

Hiow^vO'Cwns 

co 

:- 

t-oe 

9 

-t-/:ir.Mr..-.-?i 

<e 

~ 

000a 

t- 

' 

©"oo"o"uS*Us"lO*09"t-"o*lO 

oc 

oc 

^*cr 

Ol 

o-^caa 

MHH'<rHHN'*HN 

■* 

•«* 

t-c 

PS 

UMjS 

»-t       iH        iH        090909 

1— 

^« 

r- 

P! 

•*- 

V) 

V 

•»• 

«M 

s« 

9Jt-ousoo«eooo 

t- 

f" 

090 

9 

*»OHO«fOOO 

ec 

<c 

09C 

oc 

HOHnw^Ofi'N 

I 

p; 

PSCT 

■1 

tn  «« 

09PS9»oot-oooTt-o 

^ 

09V 

0 

C5 

tHi-HCO<©C~00-*''*»<c~*H 

t- 

t- 

t-l" 

i 

-C.Q 

at  da 

US00000900O9S911-I00 

09  9*o*<o\-*.-*o9t-"cet- 

Oi 

03 

00  05 

V01 

"9 

1 

.-•=  a 

-  :  i  —  s.  :?  ri  e  i eo 

1a 

Ml 

t-^ 

II 

*  c 

i-l       TH       09       NNOJ 

^ 

^ 

T- 

«e 

' 

»- 

1- 

^» 

O 

** 

■ 

^ 

Vi 

«» 

•< 

k 

aJ  • 

a!    i 

E  • 

xi 

\* 

0  : 

«8£ 

3 

a) 

O 
~u 

a 

0  0 

00 

a 

Xo 
0  0 

0*; 

m£ 

C* 

d 
^£ 

cs  0 

Sc 

Oo 

•d<o 

4)  4) 

pi 

cd  a) 
V  4) 

B 

1 

■a 

■ 

1 
o 

C"""3 

agog? 

Pes 

►ill 

£  .-  = 

«    .34 

OB  1 

4)1- 
■ 

~-J 

r. 

H 

S  1 

s 

9 

m 

CO 

4 

Oh' 

X 
00* 

e 

> 

: 
t 
1 

1 
1 

4 
"O 

c 
a! 

a 

v  a 

«i 

K  4 
o° 

« 

"3§ 

5s 

a)  0 

cc 
00 
■o-o 

4)  a, 

CC 

CSCS 
4)  4) 

c  c 

4)  4) 

cgoaffloS"" 
0  0*  0*  0  0* c 

- 
te  - 

"3*5 

h£ttac!i£icg~  *>      g 
0  <y  0  0  0  "E  ai*-"  O  *; 

< 

V  4) 

c 

ot* 

t 

r 

0  y 

r 

a)  C 
fl  1 

f 

V  V 

—  _.—  — .—  Ca>t<—,Q 

h  u 

t>  - 

.C.C.C.C.C  —  t.  O  C  — 

4)  4) 

—  - 

4)  4) 

C 

)OOC 

*. 

*- 

C 

% 

S 

ChPh 

C 

*: 

fcfi 

O 

d 

1 

> 

c 

s 

jC 

i^ 

H 

3 

H 

E 

03 

e 

4) 

OS 

^J 

1 

g 

-1 

ei 

B 

J= 

B 

O 

OJ«-S 

ej  4)°. 

3  >o 


5  «o 
°S-« 

o  — 
t,  C  4) 

""►-so 
•°  X 
<J-Oo 

£c« 
as**" 

—  ■'■■- 

u«hO 

«-•  5 

rJ«o. 

k,  o 

•  4) 

••cor 
go  a 

22»> 

—  c-o 
♦-1  B  X! 

:3  C  B 
3C  O 

■<!  o  i- 
*i  c 


238  RETURN  ON  CAPITAL 

Kansas  does  not  fairly  belong  in  the  Southwestern 
group.  The  showing  in  Kansas  is  embarrassed  by  the 
weak  Southwestern  lines  that  pass  through  the  state,  and 
reach  down  into  Texas  and  the  West,  lines  that  may  be 
earning  more  than  adequate  revenues  but,  because  of 
excessive  property  investment  and  capitalization,  make 
apparently  a  very  low  return. 

Taking  the  ten  railroad  systems  serving  the  states  of 
Iowa,  Minnesota,  North  Dakota,  South  Dakota  and  Ne- 
braska, we  find  these  railroads  earned,  above  all  operating 
expenses,  above  all  taxes,  and  above  all  interest  on  bonds 
and  debt,  and  dividends  on  preferred  stock,  enough  net 
income,  during  the  fiscal  year  1913,  to  equal  11%  on  all 
their  outstanding  common  stock  in  the  hands  of  the 
public. 

In  1914,  during  the  year  of  depression,  we  find  the  same 
group  of  railroads  earning  9.11%  net,  on  all  their  common 
stock  outstanding.  If  you  include  the  Rock  Island  and 
Illinois  Central,  8.48%. 

In  1913  the  Chicago  &  North  Western  earned  10%  on 
its  common  stock;  the  Burlington  earned  over  18%;  the 
Great  Northern  over  10% ;  the  Northern  Pacific  over  8% ; 
the  Soo  Line  over  18% ;  the  Union  Pacific  over  14% ;  and 
if  you  exclude  capitalization  issued  because  of  the  Puget 
Sound  as  well  as  income  on  the  Puget  Sound,  the  Mil- 
waukee earned  12%.  These  seven  railroads  handled  over 
75%  of  the  traffic  hauled  by  the  Northwestern  group.  In 
1914  this  same  set  of  seven  railroads  earned  over  10%  on 
all  their  common  stock  as  a  whole. 

When  this  exhibit  was  being  introduced  by  Mr.  Cham- 
bers, questions  were  asked  why  he  adopted  the  principle 
of  excluding  roads  having  two-thirds  or  more  of  their 
mileage  outside  of  the  territory;  in  other  words,  why 
didn't  he  exclude  those  having  only  one-half  of  their 
mileage  outside  of  the  territory.    Mr.  Chambers  stated  his 


RETURN  ON  CAPITAL  239 

reasons  were  simply  that  lie  wanted  to  be  fair  and  reason- 
able in  his  method. 

If  a  company  had  one-half  of  its  mileage  in  the  terri- 
tory, it  might  have  been  claimed  that  that  company  at 
least  should  have  been  included  in  the  list,  as  it  was  serv- 
ing the  territory  in  as  large  a  measure  as  it  served  any 
other  territory ;  therefore,  it  would  be  typical  of  that  dis- 
trict. However,  in  order  to  meet  the  objection,  Mr.  Cham- 
bers later  adopted  the  suggestion  and  reappeared  on  the 
stand  giving  the  results  of  his  computations. 

If  Mr.  Chambers  had  included  the  roads  having  one- 
half  of  their  mileage  outside  of  the  territory,  in  1914,  dur- 
ing the  year  of  depression,  the  Northwestern  group  of 
railroads  would  have  earned  on  their  capital  stock  8.46% 
(instead  of  8.39%).  Adopting  the  Prouty  rule  that  divi- 
dends on  preferred  stock  should  be  considered  a  fixed 
charge,  this  Northwestern  group  would  have  earned 
9.41%  on  its  common  stock,  (as  compared  with  9.11%  as 
shown  in  Exhibit  1,  excluding  those  having  two-thirds  of 
their  mileage  outside  of  the  territory). 

Dr.  Lorenz  asked  the  question, ' '  What  would  have  been 
the  result  if  you  had  excluded  only  those  roads  that  had 
one-third  or  more  of  their  mileage  outside  of  the  terri- 
tory! "  In  other  words,  you  are  only  taking  those  roads 
having  more  than  two  thirds  of  their  mileage  in  the  terri- 
tory involved.  This,  of  course,  would  exclude  the  Atchi- 
son, Topeka  &  Santa  Fe  from  any  group  of  railroads  in 
the  case.  It  would  also  exclude  the  Great  Northern  and 
Northern  Pacific  from  any  group  of  railroads  in  the  case. 
In  other  words,  trans-continental  roads  would  be  a  class 
unto  themselves.  No  account  of  their  earnings  would  be 
taken  into  the  consideration  of  the  adequacy  of  freight 
rates  in  any  given  territory.  The  tendency  of  the  day  is 
toward  having  trans-continental  lines  of  railroads.  Trans- 
continental lines  do  serve  the  territory  that  they  pass 
through,  to  as  great  or  greater  extent  than  any  railroads 


240  RETURN  ON  CAPITAL 

in  that  territory.  Their  trans-continental  traffic  serves  to 
reduce  their  cost,  inasmuch  as  that  traffic  uses  the  same 
roadbed,  etc.,  that  is  used  on  local  traffic.  Such  a  rule  of 
exclusion  we  believe  would  be  unjust  to  the  territory. 
However,  the  inquiry  is  interesting;  and,  for  that  reason, 
Mr.  Chambers  recompiled  his  exhibit  upon  those  lines, 
and  gave  the  result  of  his  computation.  He  also  excluded 
the  Union  Pacific,  although  two-thirds  of  its  mileage  is 
in  the  territory,  and  if  he  had  included  it,  it  would  have 
raised  the  percentage,  slightly. 

We  now  find  that  if  he  had  included  only  those  roads 
having  two-thirds  of  their  mileage  inside  of  the  territory, 
in  1914,  during  the  year  of  depression,  the  Northwestern 
group  of  railroads  would  have  earned  on  their  common 
stock  8.12%. 

The  Southwestern  group,  as  a  whole,  earned  upon  their 
common  stoc^§%%;  in  1914  they  earned  2.03%. 

If  you  consider  the  Western  Trunk  Line  and  Trans- 
Missouri  Committee  Territories,  you  have  the  territory 
embraced  in  the  Commission's  decision  of  1910.  In  that 
group  you  include  the  states  of  Wisconsin,  Minnesota, 
North  Dakota,  South  Dakota,  Iowa,  Nebraska,  Missouri, 
Kansas,  and  Colorado  east  of  Denver.  Using  all  the 
interstate  railroads  in  the  Commission's  order  serving 
that  territory,  excluding  only  those  having  at  least  two- 
thirds  of  their  mileage  outside  of  the  territory,  we  secure 
a  list  of  17  railroads  having  83,892  miles  of  road.  The 
territory  served  by  these  railroads  is  over  350,000  square 
miles  greater  than  both  Official  and  Southern  Classifica- 
tion Territory  put  together.  This  is  the  largest  territory, 
both  in  miles  of  railroad  and  in  square  miles,  in  the  United 
States. 

In  this  description  we  include  the  territory  served  by 
the  Western  Trunk  Line  railroads  as  above  described. 

Applying  the  Prouty  test  to  that  group  of  railroads  for 
the  year  1913,  we  secure  the  figures  showing  on  the  ac- 
companying table : 


RETURN  ON  CAPITAL 


241 


00 


.11 

3  0,0 

4* 


g£**2«2 

8    E£oS 

Q  « 


5° 


• 
<o  o  o 

Om 

a 


o— '  °  w 

O*jojft 
O&0.3 


M«5 

"3,5 

a!  ai  a 

<s  5 
o 


!010HMOr»»HUNMH91N 


MO 

00  o» 


00HlOll3MN*O>t-a>HciJ<B 


QQ 


o<cm 
OS  oo  oo 


o«o 
ot- 


oo  o 
cott 

Nt- 

O00       i-i  oooo 

t-t-       i-t  00O4 


00 


N 


COCO«OiHU300r-lrHOaJt-aiOOCSt-tfi 
iHC0as^T-tC0^T-40SC0C<lC<|00O<JiC<l 


woococo^ast-as^mor-t-coosm 

t-t«l»MlflWOONHlt-0>HV10 
OOMOOOMiniflNNNeOfflMHM 


o>5C 

0<M 


oo< 

OO' 

HO( 


>ono 

JOHN 

5oa>«o 


coooiao 

NOOCOO 

eootauso 


sastrx 
awe 

5  00O1C 


■oeo 

<rHC0 
!00  tC 


OtDlO 

o-#o 

<ONN 


(N050NO 

t>ianoo 
oo     oot-ira 


rHtH-CilOa        M 


lOtOO 

>o-^o 

■ICTIO'* 


OOOWOCOOO^O 

oooH»Non»o 

NWOt-MON^O 


soooo_ 
fcTo 


I  -  -~  — 
oocsoi 

(NNN 


Ot~0)00»«00«0 
Ht-O^COOt«U3HOo 
00  iH  lfl  NO  O0       O  l1U3 

(-"»«"©  i-Tti>"     in  n  ,_!" 

OOOqt-       o00 


N 


M 


•<& 

'A 

9 

•£>><s 

:o- 

H< 

Cogs- 
5    .»W 

-2* 

*  3  bfi  3 

"£  oj  C  eS  c<C 

OCUS  £  t.y 

...oc 
o  o  o  o;z  t. 
60  bo  bo  bo  v 
a3  cj  cd  cd *^* 

££££  2o 

0000055 


2J 


X. 


«  O-O.-02 

-ototJcO^ 
a  2 


bo5  s* 


««<5^    MS*eS!>5 

ooJq  o  =<>  .  £c„  « 
aa<  3)  o  O-o-h  CT  m  3-3  « 
°*     "bo^bo^SsC03     o 

S£ccoSow<:££kM 


to  3 

_  O 

°*£ 

-i 


id  a> 

-  h 

«  a> 

-- 


«6 

SI 


■  ^ 


■a  oo 

3* 
4) 

lM 

Ri  C 
4>  ~ 

>>£ 


O  o 


,?JcJ 

3-3 


I 


+3° 


Sp 

en1-! 

i-i 

»J«9- 

0 

bo 

•^  c 

o." 

oj-O 

t.  0) 

*J  <j, 

2  o 

"«'N 

<)  01 

is10 

£> 

d 

S  - 

a> 

-  bo 

d 

fifl 

,<-> 

Ojo 

V 

.  aj 

o 

M 

"bo 

3 

4) 

►»> 

a! 

-  S3 

s 

t* 

8 

um 

a 

J2^3 

i— 

i 

.  c 

bOcJ 

242  RETURN  ON  CAPITAL 

In  1913  Western  Trunk  Lines  earned  upon  their  com- 
mon stock  9.48%.  These  same  railroads,  during  1914,  a 
year  of  depression,  earned  7y2%  on  all  of  their  common 
stock  outstanding  in  the  hands  of  the  public.  In  1914, 
if  you  had  included  only  those  lines  having  one-half  of 
their  mileage  in  the  territory,  excluding  those  having 
over  half  of  their  mileage  outside  of  the  territory,  the 
Western  Trunk  Lines  earned  7.88%.  If  you  had  included 
only  those  roads  having  two-thirds  of  their  mileage  inside 
of  the  territory,  the  Western  Trunk  Lines  would  have 
earned  7.97%. 

The  Prouty  basis  is  perhaps  as  fair  a  one  as  can  be 
devised,  with  one  all-important  qualification  and  that  is, 
that  the  capital  does  not  exceed  the  value  of  the  property ; 
and,  to  the  extent  that  the  capital  does  exceed  that  value, 
this  test  becomes  inapplicable,  but  that  makes  the  test 
more  than  fair  to  the  railroads.  A  justification  for  this 
basis  that  is  almost  conclusive  is  that,  during  ordinary 
seasons,  in  the  case  of  a  railroad  which  meets  that  re- 
quirement, you  will  find  almost  invariably  that  the  bonds 
are  selling  at  prices  amongst  the  highest  of  any  bonds  of 
that  denomination  in  the  market;  and,  second,  that  these 
stocks  are  selling  close  to  par,  or  above  par.  No  better 
vindication  of  that  basis  can  be  asked,  than  the  fact  that 
it  is  suported  by  the  sober  judgment  of  the  investing  pub- 
lic, people  who  back  up  their  judgment  with  their  money. 

It  is  common  knowledge  that  last  year  was  a  period  of 
depression  and  yet,  if  you  take  the  average  market  prices 
of  the  stocks  of  all  our  Northwestern  group  of  railroads, 
weight  them  in  proportion  with  the  common  stock  out- 
standing, as  of  June  30, 1914,  it  is  found  that  the  average 
market  price  for  these  stocks  is  126.5.  If  you  exclude 
from  your  list  representing  the  Northwestern  territory, 
the  Great  Northern,  Northern  Pacific  and  Union  Pacific 
railroads,  it  makes  very  little  difference  in  the  result.  In 
that  case  the  average  market  price  is  125.7. 


RETURN  ON  CAPITAL 
NORTHWESTERN  GROUP. 


243 


Common 
Stock  in 
hands  of 
public    June 
30,   1914 


Average 

Market 

Price    June 

30,   1914 


Chicago   &   North    Western.... 
Chicago,  St.  Paul,  Minn.  &  Omaha 
Chicago,  Burlington  &  Quincy.  . . 

Chicago,   Great  Western 

Chicago,  Milwaukee  &  St.  Paul. . 

Minneapolis  &  St.  Louis 

Great   Northern    

Northern  Pacific 

Union  Pacific  

Minn.,  St.  Paul  &  S.  S.  M 

Total — Northwestern    Group. 
Average  market  price,  all  roads, 

Northwestern  Group 

Total — Great  Northern, 

Northern  Pacific  and  Union 

Pacific    

Total — Northwestern  Group, 
excluding  Great  Northern, 
Northern  Pacific  and  Union 

Pacific    

Average  market  price.  North- 
western Group,  excluding  Great 
Northern,  Northern  Pacific  and 
Union  Pacific  


130,117,029 

18,556,267 
110,839,100 

45,246,913 
116,850,100 

15,205,620 
238,668,929 
247,944,400 
222,291,600 

25,206,800 


$1,170,926,758 

$    708,904,929 
$    462,021,829 


131.3 

128.8 

210. 

12.4 

98.2 

13.1 

123.9 

110.1 

149.5 

122.7 


Common 
Stock  Mul- 
tiplied   by 

Average 

Market 
Price    June 

30,   1914 


170,843,659 

23,900,472 

232,762,110 

5,610,617 

114,746,798 

1,991,936 

295,710,803 

272,986,784 

332,325,942 

30,928,744 


$1,481,807,865 
126.5 

$    901,023,529 

$    580,784,336 

125.7 


a — Taken  from  Chambers  Exhibit,  Vol. 
b — Taken   from  Norton  Exhibit,  Vol    3. 
c — Bid  price. 


The  investors  on  the  market  places  of  the  country  have 
given  a  complete  vindication  to  our  claims  that  this  North- 
western group  of  railroads  is  in  a  prosperous  condition. 


WHEN  CONSIDERING  THE  REASONABLENESS  OF  RATES,  IF 
THE  CHIEF  ISSUE  IS  NOT  ONE  OF  DISCRIMINATION,  BUT 
CONCERNS  THE  AMOUNT  OF  REVENUE,  THIS  QUESTION  IS 
AT  THE  BASIS  OF  ALL  COMPUTATIONS:  DO  THE  RATES 
YIELD  A  REASONABLE  RETURN  UPON  THE  PRESENT 
VALUE  OF  THE  PROPERTY  DEVOTED  TO  THE  PUBLIC 
SERVICE? 

SUPREME  COURT  BASIS. 

The  Supreme  Court  has  very  clearly  established  the 
doctrine  described  above.  These  decisions  relate  almost 
entirely  to  state  and  municipal  schedules  of  rates,  because 
this  issue,  presented  in  the  pending  investigation,  is  un- 
usual in  interstate  commerce  litigation. 

The  question  of  what  is  a  reasonable  rate  of  return  is 
a  question  of  fact  for  the  Commission  to  determine.  The 
methods  of  finding  whether  any  given  companies  are  earn- 
ing a  reasonable  return  is  a  question  of  law.  Where  rates 
are  fixed  on  the  basis  of  the  rates  charged  elsewhere, 
under  similar  conditions,  then  the  value  of  the  property 
used  is  not  material  to  the  decision. 

If  a  commission  raises,  or  reduces,  a  schedule  upon  the 
basis  of  revenue,  then  the  value  of  the  property  becomes 
the  basis. 

These  issues  have  been  passed  upon  by  the  courts,  and 
are  thoroughly  established. 

Our  discussion  at  this  time  will  relate  to  the  following 
subjects : 

1.  Reasonable  Rate  of  Return;  and 

2.  The  Present  Fair  Value  of  Railroads  in  This  Pro- 
ceeding. 


REASONABLE  RATE  OP  RETURN  245 

WHAT  IS  A  REASONABLE  RATE  OF  RETURN? 

A  mistake  of  1%  by  you  gentlemen  in  your  conclusions 
as  to  what  constitutes  a  reasonable  rate  of  return  in  this 
case,  will  be  equivalent  to  a  mistake  of  one  billion  dollars 
in  the  value  of  the  railroads  that  are  parties  to  this  case. 
(See  footnote.) 

The  analysis  and  investigation  of  what  is  a  reasonable 
rate  of  return  is  almost  as  important  as  the  making  of 
the  national  appraisal  of  American  railroads. 

It  is  much  easier  for  the  human  mind  to  deal  with  sev- 
eral hundred  millions  of  dollars,  than  it  is  with  y2  of  1% ; 
and  that  simple  truth  justifies  our  request  that  you  give 
most  careful  consideration  to  this  problem.  You  are 
better  fitted  and  better  qualified  to  perform  that  task,  by 
experience  and  training,  than  any  other  tribunal  in  this 
nation. 

In  the  Brunswick  Water  case,  several  years  ago,  Mr. 
Leonard  Metcalf,  a  civil  engineer  of  standing,  advanced 
the  thought  that  a  company  is  entitled  to  a  so-called 
1 '  profit  increment, ' '  over  and  above  the  value  determined 
by  considerations  of  the  cost  of  reproduction,  original 
investment,  and  the  other  factors  ordinarily  named.  Mr. 
Metcalf  claimed  this  profit  increment  should  range  from 
20  to  50%.  In  the  Livermore  Falls  Water  Works  valua- 
tion, he  placed  this  " profit  increment"  at  33  1-3%.  The 
counsel  in  the  case,  more  adroitly,  perhaps,  allowed  for 
this  same  percentage;  not  on  the  value  of  the  plant,  as 
Mr.  Metcalf  insisted  was  the  correct  method,  but  by 
adding  it  to  the  ordinary  money  interest  rate  in  that 
locality,  so  as  to   find   "a  reasonable  rate   of  return." 

FOOTNOTE — The  total  book  value  of  the  railroads  named  in  the  Com- 
mission's suspension  order  in  this  case  is  approximately  $5,000,- 
000,000.  If  5%  is,  in  fact,  a  reasonable  return  in  this  industry  on 
the  entire  property  of  a  railroad,  an  error  of  1%  is  equal  to  a  mis- 
take of  one-fifth  of  the  whole;  it  has  the  same  effect  on  the  result 
as  a  mistake  of  one  billion  dollars  in  the  valuation  adopted. 


246  REASONABLE  RATE  OF  RETURN 

While  the  final  figures  are  identical,  the  effect  on  the  mind 
of  the  two  methods  used  is  amazingly  different.  Mr.  Met- 
calf,  in  the  case  referred  to,  added  $21,325  to  the  original 
cost  amounting  to  $65,475;  while  counsel  in  the  case 
adopted  $1.25  as  the  " ratio  of  profit  to  capital  cost," 
using  6%%  as  a  reasonable  rate  of  return,  assuming  the 
cost  of  capital  to  be  5Y2%. 

Variations  of  a  fraction  of  1%  seem  so  insignificant 
that  we  are  far  more  apt  to  overlook  or  accept  them  as 
approximately  correct;  while  a  concrete  sum  amounting 
to  $21,000  to  be  added  to  $65,000  immediately  challenges 
our  attention  and  demands  full  investigation.  Twenty- 
one  thousand  dollars  ($21,000)  looks  much  larger  to  the 
ordinary  man  than  li/4%. 

Careful  and  exhaustive  discussions  in  the  opinions  of 
our  commissions  and  courts  analyzing  decimal  fractions, 
will  be  somewhat  of  a  departure  from  our  legal  liter- 
ature of  the  past;  and  yet  the  commercial  demands  of 
modern  business  are  actually  forcing  that  very  situation 
upon  courts  and  commissions. 

If  we  have  not  been  accustomed  to  negotiations  for 
the  purchase  and  sale  of  properties  aggregating  ten  and 
fifty  million  dollars  in  value,  it  is  impossible  for  us  to 
form  a  rational  and  just  idea  of  what  is  a  reasonable 
rate  on  such  investments. 

We  must  consult  those  who  are  making  this  class  of 
investments. 

There  are  two  places  to  go  for  knowledge  as  to  what  is  a 
reasonable  rate;  one  isj&o  directly  to  the  financiers  who 
have  marketed  large  blocks  of  such  securities  during 
recent  years ;  the  other  is  to  examine  the  records  of  actual 
prices  paid  and  returns  earned  upon  investments  in  some 
well  established  railway  companies. 

It  is  probable  that  this  Commission  could  adopt  any 
rate  of  return,  varying  from  2%  to  10%,  as  reasonable; 


REASONABLE  RATE  OF  RETURN  247 

then  both  the  shippers  and  the  railroads  would  be  help- 
less, and  entirely  unable  to  reverse  your  decision.  What 
is  the  use  of  finding  by  elaborate  investigation  whether 
the  return  is  4,  5,  6,  or  7%,  unless  you  also  make  an  intel- 
ligent investigation  of  what  is  a  reasonable  return  ?  Ave 
you  going  to  guess  off  this  latter  issue,  at  random! 

Each  one  of  us,  probably,  has  a  different  standard  of 
what  is  a  reasonable  rate  on  investments.  There  is  a 
standard  of  more  practical  value  than  the  opinion  of 
innumerable  shippers,  or  of  railroad  presidents,  who 
might  be  placed  upon  the  witness  stand.  Once  more  the 
investor,  himself,  becomes  our  witness,  and  his  testimony 
is  again  recorded  in  the  reports  from  the  market  places. 

In  dealing  with  this  issue  it  is  necessary  for  a  person 
to  disabuse  his  mind  of  any  personal  or  preconceived 
notions  that  are  not  the  result  of  actual  contact  with  in- 
vestments of  the  character  under  consideration,  either 
by  personal  experience  or  by  investigation  of  the  experi- 
ence of  others.  What  constitutes  a  reasonable  rate  of 
return  varies  with  the  hazard  and  character  of  any  busi- 
ness. A  man  owning  a  government  bond  is  "an  Ameri- 
can citizen,"  and  he  is  giving  his  money  to  the  govern- 
ment to  use  for  public  purposes.  Has  he  the  right  to  a 
return  of  7  or  8%  ?  He  cannot  get  it.  Even  if  the  govern- 
ment paid  that  rate  of  interest,  they  would  be  in  such 
demand  that  you  couldn't  purchase  a  bond  for  less  than 
two  or  three  times  their  par  value. 

The  value  of  the  railroad  property  estimated  in  the 
United  States  census  of  1910  was  $15,000,000,000.  The 
value  of  the  farm  property  according  to  the  United 
State  census  of  1910,  was  $40,991,000,000.  (Wallace,  tr. 
4329.) 

It  is  true  some  farms  earn  8  and  10%,  possibly  higher 
in  some  portions;  on  the  other  hand  there  are  hundreds 
of  millions  of  dollars  invested  in  farm  land  earning  3% 


248  REASONABLE  RATE  OF  RETURN 

on  their  present  value,  aside  from  a  meager  labor  wage 
to  the  owner. 

Billions  of  dollars  all  over  the  nation  seek  investment 
at  from  2Vi  to  5%.  In  1913  the  outstanding  public  debt 
represented  by  public  bonds  was  almost  $3,000,000,000. 
Of  this,  the  prevailing  rate  was  about  2%%. 

According  to  the  National  Monetary  Commission,  there 
were  in  1909,  $5,174,000,000  in  the  savings  banks  of  the 
United  States;  and  the  average  rate  of  interest  paid 
to  the  investors  was  3.55%.  Last  year  there  were  ap- 
proximately ten  billion  dollars  in  railroad  bonds  out- 
standing in  the  hands  of  the  public,  on  which  the  average 
rate  of  interest  was  close  to  4%. 

The  true  basis  of  computation  of  the  average  rate 
of  return  is  not  the  return  paid  on  the  par  value  of  a 
security,  but  the  yield  on  the  amount  actually  invested. 
The  stock  might  be  paying  10%  on  its  par  value;  if  the 
price  on  the  market  is  200,  the  return  to  the  investor  is 
only  5%. 


REASONABLE  RATE  OF  RETURN 


249 


The  following  table  shows  the  yields  investors  are 
receiving  on  their  money  placed  in  government  bonds. 
Some  of  these  securities  carry  with  them  privileges  in 
addition  to  the  actual  money  return,  which  reduces  the 
yield : 


ACTUAL  RATES  OF  INTEREST  YIELDED  BY  INVESTMENTS  IN 

BONDS  OF  THE  AMERICAN,  BRITISH,  FRENCH  AND 

GERMAN  GOVERNMENTS. 


U.  S.   4's  of 

1907  and 

1925 

English 
Consols 
2%  and 

2%% 

French 
Rentes 

3% 

German 
3's 

1890   

2.37 
2.58 
2.73 
2.96 
2.72 
2.91 
3.14 
2.73 
2.69 
2.47 
2.18 
1.97 
1.98 
1.99 
2.09 
2.00 
2.04 
2.18 
2.44 
2.52 
2.73 
2.68 
2.67 
2.74 
2.73 

2.86 
2.88 
2.85 
2.81 
2.73 
2.60 
2.49 
2.45 
2.49 
2.57 
2.77 
2.93 

2'92  «/ 

2.84 
2.79 
2.84 
2.98 
2.91 
2.98 
3.08 
3.17 
3.26 
3.40 
3.33 

3.32 
3.19 
3.09 
3.10 
3.01 
2.95 
2.95 
2.91 
2.93 
2.97 
2.99 
2.98 
2.99 
3.07 
3.09 
3.04 
3.08 
3.18 
3.13 
3.09 
3.07 
3.14 
3.24 
3.47 
3.51 

3.45 

1891    

3.52 

1892   

3.48 

1893    

3.48 

1894   

3.31 

1895   

3.03 

1896   

3.02 

1897   

3.07 

1898    

3.14 

1899   

3.31 

1900    

3.46 

1901    

3.36 

1902    

3.25 

1903    

3.28 

1904    

3.33 

1905   

3.33 

1906   

3.42 

1907   

3.57 

1908    

3.62 

1909    

3.54 

1910   

3.55 

1911   

3.59 

1912   

3.74 

1913    

3.97 

1914   

3.90 

(From  Norton  Exhibit  3,  page  38.) 


250 


REASONABLE  RATE  OF  RETURN 


The  following  table  shows  actual  money  earned  on  in- 
vestments in  the  bonds  of  four  representative  Western 
railroads,  during  the  past  25  years : 

ACTUAL  RATES  OF  INTEREST  YIELDED  BY  INVESTMENTS  IN 
FOUR  WESTERN  RAILWAY  BONDS  BY  YEARS,  1890-1914. 


M.,  K.  &  T. 

% 

C,  St.  P., 
M.  &  O. 

% 

C,  B.  &  Q. 

% 

C,  M.  & 

St.  P. 

% 

1890  

5.20 
5.25 
5.04 
5.17 
5.04 
4.76 
4.92 
4.78 
4.57 
4.34 
4.40 
4.11 
4.05 
4.13 
4.06 
3.97 
4.03 
4.24 
4.15 
4.01 
4.07 
4.11 
4.22 
4.43 
4.61 

4.96 
5.06 
4.84 
4.97 
4.63 
4.56 
4.65 
4.28 
4.12 
3.97 
4.09 
3.83 
3.81 
4.09 
4.03 
3.79 
3.97 
4.27 
4.18 
3.95 
4.13 
4.13 
4.25 
4.50 
4.47 

4.53 
4.92 
4.73 
4.94 
4.72 
4.64 
4.80 
4.51 
4.07 
3.47 
3.42 
3.40 
3.50 
3.69 
3.72 
3.61 
3.78 
4.08 
4.04 
3.94 
4.09 
4.11 
4.19 
4.45 
4.29 

4.39 

1891  

4.79 

1892  

4.49 

1893  

4.42 

1894  

4.46 

1895  

4.38 

1896  

4.28 

1897  

3.96 

1898  

3.83 

1899  

3.59 

1900  

3.61 

1901  

3.59 

1902  

3.51 

1903  

3.70 

1904  

3.68 

1905  

3.59 

1906  

3.71 

1907  

3.95 

1908  

3.93 

1909  

3.87 

1910  

4.01 

1911  

4.05 

1912  

4.09 

1913  

4.30 

1914  

4.26 

(From  Norton  Exhibit  1,  page  5.) 

We  cannot  expect  investors  to  place  their  money  in 
railroad  stocks  and  bonds  at  the  same  rate  they  make  on 
government  bonds,  or  at  the  same  rate  they  make  on 
deposits  in  the  banks.  These  facts  are  stated  merely 
to  challenge  attention  to  the  situation  that  there  are 
thousands  of  millions  of  dollars  in  this  country  seeking 
investment  at  around  4V2%  or  less.  One  cannot  deal 
fairly  with  these  questions  until  that  fact  sinks  into  his 
consciousness. 

You  cannot  expect  people  to  invest  in  railroad  stocks 
at  the  same  rate  they  will  invest  in  government  bonds; 


REASONABLE  RATE  OF  RETURN  251 

in  the  same  way  you  cannot  expect  people  to  invest  in 
local  gas  plants,  or  electric  light  plants,  at  the  same  rate 
they  will  invest  in  railroads.  The  reasonable  rate  of 
return  varies  from  2y2  to  10%  on  ordinary  investments. 
What  is  reasonable  in  one  case  is  unreasonable  in  another 
case. 

How  shall  we  find  the  reasonable  rate  on  the  total 
value  of  a  railroad  property?  No  person  buys  or  sells 
great  railroad  systems  in  bulk.  We  don't  buy  or  sell 
them  that  way.  We  buy  and  sell  them  by  piece  meal 
in  the  shape  of  stocks  and  bonds.  To  imagine  what  would 
be  a  rate  the  investing  public  would  consider  reasonable, 
on  a  railroad  property  as  a  whole,  requires  a  flight  into 
the  unknown,  into  the  realm  of  speculations  and  dreams. 
In  the  practical  world  of  today,  we  must  reckon  with 
facts  as  they  are. 

What  is  a  reasonable  rate  of  return  on  bonds  of  repre- 
sentative railroads  is  not  a  matter  of  mere  speculation. 
That  can  be  very  definitely  ascertained  by  investigating 
the  records  of  the  market  place,  where  securities  are 
bought  and  sold.  That  has  been  done  in  this  case ;  and  it 
has  been  conclusively  shown  that  in  the  eyes  of  the  invest- 
ing public  4.5%  is  a  reasonable  rate  of  return  on  bonds  of 
representative  railroads.  As  to  what  constitutes  a  reason- 
able rate  of  return  on  railroad  stocks,  we  can  also  secure 
information  of  a  very  definite  and  positive  character.  We 
might  combine  these. 

A  reasonable  rate  of  return  on  stocks  cannot  be  ac- 
cepted by  this  Commission  as  a  reasonable  rate  of  return 
on  total  value  of  a  property.  If  you  owned  the  whole 
plant  without  any  mortgage  attached  to  it;  if  you  had 
the  whole  plant  supporting  the  stock,  the  rate,  or  yield, 
would  be  some  amalgamation  of  the  yield  on  bonds  and 
stocks.  It  would  be  higher  than  the  bond  yield,  and 
lower  than  the  stock  yield.  Unfortunately  we  have  to 
reckon  with  things  as  they  are.    We  cannot  get  the  judg- 


252  REASONABLE  RATE  OF  RETURN 

ment  of  the  investors  of  the  nation  as  to  the  yield  on  a 
purchase  and  sale  of  a  whole  plant  like  the  North  Western 
railroad  system,  worth  several  hundred  million  dollars. 
People  do  not  buy  and  sell  properties  like  that,  in  that 
manner.  They  buy  and  sell  them  by  piece  meal,  in  stocks 
and  bonds. 

We  cannot  tell ;  nobody  else  can  tell  what  the  judgment 
of  the  investors  of  the  country  would  be  as  to  the  reason- 
able rate  of  return  on  the  Milwaukee  railroad  property 
as  a  whole.  We  can  very  readily  find  out  the  judgment  of 
these  men  as  to  the  reasonable  rate  of  return  on  the  bonds 
of  this  company,  or  on  the  stock  of  this  company. 

It  is  unsound  to  say  that  the  securities  of  a  railroad 
company,  or  any  other  kind  of  a  company,  have  to  pay 
annual  returns  equal  to  those  prevailing  in  other  indus- 
tries, or  equal  to  the  prevailing  interest  rates  in  any 
given  territory,  in  order  that  the  said  securities  may  be 
attractive  to  investors.  Otherwise,  we  are  told,  people 
will  put  their  money  into  those  other  enterprises.  This  is 
a  very  common  fallacy,  that  has  been  widely  circulated 
and  accepted,  sometimes  by  most  eminent  gentlemen ;  but 
it  is  a  fallacy,  nevertheless. 

What  is  reasonable  in  one  industry  for  one  security 
is  unreasonable  for  another.  Farms  do  not  earn 
what  other  industries  earn  in  the  same  locality ;  and  they 
do  not  earn  an  amount  equal  to  the  prevailing  interest 
rates  in  that  section.  And  yet  farms  are  attractive  to 
some  investors. 

Government  bonds  do  not  have  to  pay  a  return  equiva- 
lent to  the  prevailing  interest  rates  in  the  country,  or 
equal  to  what  investments  in  various  industries  earn, 
in  order  to  be  attractive  to  investors.  If  this  government 
in  a  handsome,  public  spirited  manner,  should  resolve, 
like  this  Commission  is  asked  to  decide  as  to  railroads, 
that  American  citizens  who  loaned  this  government  their 
hard  earned  cash,  in  order  to  carry  on  the  public  work 


REASONABLE  RATE  OF  RETURN  253 

of  our  National  Government,  are  entitled  to  receive,  and 
shall  receive,  a  return  equivalent  to  that  earned  on  money 
invested  generally  in  this  country,  or  equal  to  the  pre- 
vailing interest  rates  in  the  United  States.  If  this  gov- 
ernment did  that,  from  a  humanitarian  standpoint,  in 
order  to  render  justice  to  these  patriotic  citizens;  or  if 
we  did  that  because  of  an  imaginary  necessity,  in  order 
to  make  our  securities  sufficiently  attractive  that  we 
might  get  adequate  funds  with  which  to  run  our  govern- 
ment— a  purpose  certainly  most  laudable,  and  of  the  very 
first  importance  to  the  welfare,  and  happiness,  and  pros- 
perity, of  all  industries — if  we  pursued  that  policy,  first 
we  would  be  the  laughing  stock  of  all  nations  on  the 
earth ;  and,  second,  the  ordinary  citizens  could  never  get 
a  glance  at  those  bonds,  unless  by  the  assistance  of  the 
police  force  to  keep  the  crowd  back.  Any  purchaser  who 
bought  those  bonds  from  the  original  purchaser  would 
have  to  pay  such  a  price  that  although  the  bond  paid  as 
high  as  7%,  he  could  not  make  3Y2%. 

Likewise,  the  North  Western  Railroad  does  not  have  to 
pay  its  unreasonable  dividend  of  7%  to  make  its  stocks 
attractive.  There  is  no  reason  why  the  North  Western 
should  be  eating  up  its  surplus  in  that  manner.  The 
North  Western  stock  would  readily  command  one  hundred 
cents  on  the  dollar  with  a  5  or  6%  return,  like  the  Penn- 
sylvania, or  the  New  York  Central.  North  Western  stock 
is  today  selling  around  125.  But  if  this  company  con- 
tinues to  dissipate  its  resources  by  stock  allotments  below 
the  market  price,  and  by  the  payment  of  exorbitant  divi- 
dends, those  market  prices  must  go  lower.  The  North 
Western  has  given  away,  since  1903,  rights,  that  are 
equivalent  to  stock  dividends,  aggregating  $79  per  share. 
During  the  same  time  it  has  been  paying  8%  on  preferred 
stock,  when  4%%  would  readily  command  par,  thereby 
forcing  the  market  prices  up  to  prices  ranging  from 
175  to  190,  on  their  preferred  stock.  Four  to  5%  is  the 
prevailing,  and  usual  dividend  on  preferred  stocks  in 


254  REASONABLE  RATE  OF  RETURN 

this  country.  The  investors  on  the  market  places  of 
this  country  have  " declared  in  unequivocal  language" 
that  the  North  Western  is  paying  dividends  that  are 
greater  by  from  50  to  100%  than  is  necessary  to  make 
their  securities  attractive  to  investors. 

While  the"  dividends  on  the  common  stocks  of  the 
North  Western  last  year  were  7% ;  the  prices  were  so 
high  during  that  year  of  depression  that  you  could  not 
buy  them  on  the  market  and  make  over  5  1-3%  on  the 
investment. 

While  the  dividend  on  the  preferred  stocks  amounted 
to  8%,  prices  were  so  high  that  you  could  not  make  4%% 
on  your  investment.  Taking  the  average  interest  on  all 
the  bonds  of  the  North  Western,  and  the  average  current 
market  prices  on  these  bonds,  the  investor  could  not  get 
these  securities  at  an  average  price  for  all  of  them  which 
would  net  him  over  4%%.  (Norton  Exhibit  3,  page  5.) 
Not  much  over  one-third  of  the  capitalization  of  the 
North  Western  is  common  stock;  this  yielding  a  return 
on  current  quotations  of  5  1-3% ;  the  balance  of  the  capi- 
talization earning  from  4y2  to  4%%  on  current  quota- 
tions. With  practically  two-thirds  of  the  capitalization 
on  a  4%%  basis,  or  less,  and  one-third  on  a  5  1-3%  basis, 
it  is  apparent  that  the  yield  on  the  market  value  of  the 
entire  plant,  based  on  prices  fixed  by  actual  investors 
as  reasonable,  last  year  when  prices  were  depressed, 
was  less  than  4.9%.  During  ordinary  years  this  yield 
on  the  entire  plant  would  probably  be  4.75%  or  less. 

It  is  true  that  the  stockholder  may  count  on  more  re- 
turn than  the  annual  dividend,  such  as  the  undivided  sur- 
plus, including  additions  and  betterments  built  and 
charged  to  operating  expenses,  or  to  surplus.  On  the 
other  hand,  he  may  consider  those  surplus  earnings  as 
devoted  to  maintaining  the  credit  of  the  company,  tiding 
over  lean  years,  building  non-productive  improvements, 
such  as  depots,  overhead  crossings,  etc.,  and  maintaining 


REASONABLE  RATE  OF  RETURN  255 

the  returns  to  the  stockholder,  over  and  above  these  other 
factors,  at  the  present  level,  during  lean  years  as  well  as 
fat  years. 

In  determining  what  is  a  reasonable  rate  of  return,  a 
perplexing  problem  involved  will  be  the  proper  return  on 
the  value  of  expensive  terminals  belonging  to  these  com- 
panies. It  will  not  be  necessary  at  this  time  to  enter 
upon  a  discussion  of  this  question.  However,  we  desire 
to  call  attention  to  one  precedent  from  a  state  supreme 
court,  which  is  noted  in  the  annals  of  rate  regulation,  and 
which  has  been  cited  as  an  authority  as  much,  if  not  more, 
than  most  of  the  decisions  of  the  Supreme  Court  of  the 
United  States.  In  Steenerson  v.  Great  Northern  Ry.  Co., 
(69  Minn.,  353)  the  court  said: 

"It  is  not  necessary  to  determine  here  what  rate 
of  annual  income  on  the  cost  of  reproducing  these 
terminals  is  the  lowest  which  the  court  would  uphold 
before  declaring  the  rates  fixed  by  the  commission 
confiscatory.  But  we  are  of  the  opinion,  that  exclu- 
sive of  taxes,  214%  per  annum  is  a  liberal  income  on 
such  cost,  and  that  is  as  far  as  it  is  necessary  to  go 
for  the  purposes  of  this  case. ' ' 

The  reasonable  rate  of  return  in  one  territory  will  not 
apply  to  another.  The  same  is  true  of  different  indus- 
tries. All  business  has  its  hard  times.  A  farm  which 
yields  a  return  of  4%  or  5%  in  good  times  will  not  yield 
1%  above  taxes  in  hard  times. 

The  promoters  of  these  properties  reaped  their 
rewards  a  generation  or  two  ago.  And  today,  the 
financier  who  buys  a  large  block  of  stock  of  a  poor  com- 
pany, re-organizes  it,  increases  its  return  1%  or  2%,  re- 
ceives his  handsome  rewards  in  the  market  value  of  his 
stock,  and  cashes  it  in. 

The  early  investors  in  railway  securities  reaped  ex- 
traordinary profits,  or  lost  their  investments.  Those 
days  have  come  and  gone.  An  advance  in  freight  rates 
will  rarely,  if  ever,  be  of  any  benefit  to  the  persons  who 


256  REASONABLE  RATE  OF  RETURN 

first  put  their  money  into  these  properties.  A  number 
of  these  railroads  passed  through  receiverships  many 
years  ago.  Roads,  like  the  Santa  Fe  and  the  Union  Pa- 
cific, have  had  that  experience  within  the  time  covered  by 
our  exhibits ;  and  today,  those  are  two  of  the  representa- 
tive prosperous  companies  in  the  territory.  Those  who 
have  reaped  these  splendid  rewards  will  be  the  ones  who 
will  further  profit  by  an  advance  granted  to  them.  The 
Santa  Fe  and  the  Union  Pacific  constitute  remarkable 
and  concrete  evidence  that  properties  can  recover  them- 
selves completely  without  the  aid  of  any  general  advance 
in  freight  rates. 

It  has  been  suggested  that  if  you  limit  the  maximum 
return,  you  should  guarantee  a  minimum  return.  That 
is  not  a  correct  statement  of  the  situation.  In  ordinary 
business,  competition  limits  the  maximum  return;  but  it 
is  very  far  from  guaranteeing  any  minimum  return.  In 
this  industry,  competition  is  practically  wiped  out,  and 
the  government  is  simply  taking  its  place.  There  is  no 
effort  to  reduce  the  maximum  below  the  limit  competition 
has  fixed  in  other  industries ;  and  railroading  should  have 
no  favors  not  possessed  by  those  in  other  lines  of  ordi- 
nary business.  When  hard  times  come,  those  who  are 
interested  financially  in  railroads  must  suffer  with  the 
rest  of  us. 

"When  times  are  prosperous,  and  capital  invested 
in  other  lines  of  enterprise  is,  as  a  general  rule,  bring- 
ing good  returns,  that  invested  in  the  railroad  busi- 
ness brings  good  returns  also.  In  times  of  financial 
stringency,  when  other  classes  of  commercial  con- 
cerns are  doing  business  at  a  loss,  there  is  no  reason 
why  a  railroad  company  must  still  make  good  profits. 
This  system  of  roads  earned  large  dividends  when 
times  were  prosperous.  If  times  become  again  pros- 
perous, its  prospects  for  making  good  profits  on  the 
cost  of  reproducing  the  system  are  at  least  as  good 
as  the  prospects  of  business  concerns  generally." 
(Steenerson  v.  Great  Northern  Ry.  Co.,  69  Minnesota 
Reports,  pages  353-390.) 


REASONABLE  RATE  OF  RETURN  257 

When  the  Commission  held  the  revenue  of  the  Balti- 
more &  Ohio  adequate,  finding  that  company  to  be  earn- 
ing 7^2%  upon  its  common  stock,  the  earning  upon  the 
total  value  of  the  property  was  5.21%.  Considering  the 
fact  that  at  the  present  time  bonds  are  selling  for  4V2%> 
and  they  represent  ordinarily  two-thirds  of  the  railroad 
value,  while  stocks  of  representative  companies  are  sell- 
ing at  the  rate  of  5%  to  6%,  the  yield  on  the  whole  would 
be  less  than  5%,  consequently  the  yield  of  5.21%  on  the 
entire  capitalization  representative  of  the  whole  property 
must  be  accepted  as  very  liberal  for  this  class  of  security. 

Of  the  number  of  farms  embraced  in  the  analysis  made 
by  Mr.  Wallace,  if  the  farmer  was  allowed  an  annual 
wage  of  $1,000  for  his  labor,  he  would  have  earned  less 
than  1%  upon  the  value  of  his  farm ;  if  you  allow  him  $600 
annually  for  his  labor,  he  would  earn  3.1%  on  his  prop- 
erty. A  digest  of  this  testimony,  as  well  as  that  of  the 
representative  from  the  United  States  Department  of 
Agriculture,  Mr.  Thompson,  also  Mr.  Ray  and  Mr.  Dan- 
forth,  on  this  subject,  is  given  in  the  abstract. 

The  investor  in  railroad  stocks  has  no  responsibility 
whatever  in  the  management  of  the  property.  He  puts 
his  money  into  the  investment ;  and  he  goes  away,  leaves 
it.  He  comes  back  a  year  later,  draws  his  dividend  and 
goes  away  again.  To  be  sure,  it  takes  ability  of  the  high- 
est class  to  manage  and  efficiently  direct  the  financial  and 
business  operations  of  a  great  railroad  system;  but  the 
men  who  do  this  class  of  work  get  princely  salaries,  ex- 
ceeding those  of  the  highest  positions  in  the  United  States 
Government  held  by  men  with  the  responsibilities  of  the 
nation  on  their  shoulders.  And  those  high  salaries  come 
out  of  operating  expenses  which  the  public  pays.  The 
capacity  and  intelligence  required  of  the  stockholders  in 
any  one  of  these  representative  western  lines  of  railroads, 
consists  in  the  ability  to  cash  a  check. 

When  we  ascertain  the  fair  value  of  these  properties, 


258  REASONABLE  RATE  OF  RETURN 

we  will  then  know  what  companies  are  reasonably  and 
justly  capitalized ;  then  the  Prouty  test  of  1910  will  have 
a  sure  foundation,  in  fact. 

It  does  make  a  difference  to  the  public  whether  rail- 
roads are  properly  capitalized.  It  is  just  as  important 
to  the  consumers  and  shippers  of  the  United  States  that 
the  railroads  shall  be  properly  financed  as  it  is  that  they 
shall  be  properly  managed  and  operated.  The  division 
of  securities  into  stocks  and  bonds  is  an  invention  of 
finance,  and  the  public  is  entitled  to  share  in  the  results 
growing  out  of  that  invention  of  finance.  The  public 
must  not  absorb  it  all;  nor  must  the  railroads  absorb  it 
all.  There  must  be  some  give  and  take,  some  dividing  up 
of  the  profits,  following  every  step  of  progress  in  all  lines 
of  activity ;  and  this  is  one  of  them. 

The  cross  examination  of  Mr.  McCrea,  president  of  the 
Pennsylvania  Eailroad  Co.,  in  1910,  by  Commissioner 
Prouty,  is  very  interesting  and  suggestive  in  this  discus- 
sion. The  following  argument  was  had  between  the  late 
President  McCrea  and  the  former  distinguished  member 
of  this  Commission : 

"Commissioner  Prouty:  Do  you  say  you  think 
your  company  ought  to  pay  7%  to  its  stockholders 
or  ought  to  earn  7%  on  its  stock? 

"Mr.  McCrea:  I  think  we  ought  to  pay  7%,  sim- 
ply on  the  ground  and  exactly  the  same  grounds  that 
I  mentioned — that  we  have  for  a  long  time  paid  6%, 
and  our  stockholders  are  as  a  rule  small  stockhold- 
ers ;  they  are  real  investors,  and  there  is  a  very  large 

number  of  them — women  and  children  in  the  states. 

#     #     # 

1  *  Commissioner  Prouty :  I  was  talking  with  a  man 
up  in  my  state  the  other  day  who  had  $10,000  to  in- 
vest for  a  widow  whose  husband  had  just  died  and 
left  that  amount  of  cash.  He  told  me  he  knew  of  no 
place  where  he  could  invest  that  money  that  would 
return  her  over  5%,  after  the  taxes  had  been  paid. 
Do  you  know  of  any  investment  which  would  be  safe 
and  which  would  return  that  woman  5%f     I  do  not 


REASONABLE  RATE  OF  RETURN  259 

ask  you  to  mention  the  investment,  but  the  nature 
of  it. 

"Mr.  McCrea:  I  think  I  can  only  say  that  when 
one  is  investing  a  widow's  funds,  you  must  always 
aim  at  a  maximum  of  security  of  the  principal,  even 
if  it  brings  down  to  rather  a  minimum  the  return  of 
it.  My  sympathies  are  with  your  friend  up  in  your 
state.  I  can  understand  how  he  was  in  a  pretty  hard 
position. 

1 '  Commissioner  Prouty :  I  understand  you  to  say 
the  holders  of  Pennsylvania  stock  were  entitled  to 
7%,  that  stock  being  held  by  widows  and  orphans. 
What  are  the  widows  entitled  to  who  are  not  fortu- 
nate enough  to  own  Pennsylvania  stock  ? 

"Mr.  McCrea:  There  is  no  reason  why  they  should 
not  own  it.  Those  widows  who  own  Pennsylvania 
stock  have  bought  it,  not  on  my  advice  or  the  advice 
of  anybody  I  know,  but  they  have  looked  over  the 
situation  and  they  have  felt  it  was  a  good  investment. 
You  see,  your  friend  said  he  could  only  get,  after  tak- 
ink  all  things  into  consideration,  5%.  The  widow 
and  orphan  who  bought  Pennsylvania  stock,  with  the 
premium  on  it,  I  doubt  if  they  are  getting  on  an  aver- 
age, b%  on  it. 

"Commissioner  Prouty:  And  if  you  paid  a  divi- 
dend of  10%  the  widow  who  bought  it  on  that  basis 
would  only  get  5%?  That  being  so,  if  a  good  secur- 
ity sells  on  a  5%  basis,  why  should  you  pay  the  stock- 
holder in  the  Pennsylvania  road  more  than  5%? 

"Mr.  McCrea:  I  do  not  think  it  does.  I  think 
there  is  justice  all  around.  I  think  if  it  is  just 
that  the  employes  should  receive  a  consideration  in 
the  matter  of  increase  in  cost  of  living,  that  certainly 
the  investor  who  makes  it  possible  for  him  to  be  in 
the  service  has  some  right  to  consideration. 

"Commissioner  Prouty:  Do  you  think  the  in- 
vestor in  railroad  stock  is  entitled  more  than  the  in- 
vestor in  any  other  security  of  the  same  grade,  to 
such  a  return? 

"Mr.  McCrea:  No,  sir,  I  do  not  know  that  I  do. 
It  is  not  a  question  exactly  of  the  rate.  It  is  a  ques- 
tion of  what  money  conditions  force  on  them. ' ' 


260  REASONABLE  RATE  OF  RETURN 

Two  classes  of  people  own  our  railroads — the  bond- 
holders and  the  stockholders.  The  reasonable  rate  on 
that  part  of  the  property  represented  by  bonds  is  con- 
clusively proved  by  Norton  Exhibits  3  and  4  to  be  ap- 
proximately 41/2%  for  representative  railroads,  during 
ordinary  seasons. 

"With  reference  to  the  stocks  of  the  Northwestern  group 
of  railroads,  we  find  in  the  eyes  of  the  investing  public 
that  the  rate  in  ordinary  seasons  approaches  close  to  5% ; 
while  during  the  present  period  of  depression  it  has 
ranged  between  5%  and  6%.  The  Burlington  pays  a  divi- 
dend of  8%.  The  last  bid  on  Burlington  stock  of  which 
public  record  has  been  kept  in  1914  was  210,  the  rate  ap- 
proximating 4%.  On  the  Norton  Exhibit  3,  page  128, 
these  facts  are  detailed.  The  Great  Western  stocks,  pay- 
ing no  dividends,  sold  for  12;  but  we  have  no  basis  to 
figure  the  return.  The  Chicago  &  North  Western,  pay- 
ing a  dividend  of  7%,  sold  last  year  at  an  average  price 
of  131.  The  Great  Northern,  paying  7%,  sold  at  an  av- 
erage of  approximately  124.  The  Minneapolis  &  St. 
Louis  is  a  weak  sister  in  the  territory,  its  stock  selling 
at  13.  The  Minneapolis,  St.  Paul  &  Sault  Ste.  Marie,  pay- 
ing a  dividend  of  7%,  sold  last  year  at  an  average  price 
of  122.  The  Chicago,  Milwaukee  &  St.  Paul,  which  has 
been  paying  a  dividend  of  5%  for  several  years,  fell 
slightly  below  par,  selling  for  98.2%.  This  is  a  reflection 
of  the  unfortunate  relationship  with  the  Puget  Sound. 
The  Northern  Pacific,  paying  a  dividend  of  7%,  sold  at 
110.  The  Union  Pacific,  paying  a  dividend  of  9%,  sold  at 
150. 

Considering  the  period  of  depression  that  has  been 
growing  through  the  last  few  years,  culminating  in  the 
year  1914,  as  has  been  so  strikingly  exemplified  by  the 
witnesses  who  appeared  before  this  Commission,  in  all 
other  lines  of  industry  that  will  be  affected  by  these  ad- 
vances, these  prices  must  constitute  a   very   conclusive 


REASONABLE  RATE  OF  RETURN  261 

proof  that  a  reasonable  rate  of  return  on  railroad  stocks, 
during  periods  of  depression,  mr  probably  close  to  5y2% ; 
during  ordinary  years  tti&y  ai'e  probably  close  to  5%.  If 
a  given  stock  is  not  embarrassed  by  some  intercorporate 
relationship,  or  bad  management  of  the  directorate  of 
the  company — if  it  is  one  of  these  well-established  North- 
western lines  of  railroad,  and  has  been  able  to  pay  5%  to 
6%  over  a  representative  period  of  years,  the  market 
prices  of  these  stocks  have  ranged  at  par  or  above. 

Taking  all  the  stocks  of  our  Northwestern  group  of 
railroads,  weighting  them  in  proportion  to  the  capital 
stock  outstanding,  their  average  price  in  the  year  1914 
amounted  to  126.5.  If  you  eliminate  the  Great  Northern, 
Northern  Pacific  and  Union  Pacific,  the  average  price 
was  125.8.  This  is  a  remarkable  demonstration  that  the 
stocks  of  these  companies  are  worth  100  cents  on  the  dol- 
lar in  the  eyes  of  the  investing  public,  although  it  is  com- 
mon knowledge  that  large  portions  of  them  do  not  and 
never  have  liiHWjTrepresented  bona  fide  investments  in  the 
property.  There  is  not  a  railroad  company  in  this  or  any 
other  part  of  the  United  States  that  has  paid  6y2%  or  7% 
dividends  to  its  stockholders,  whose  stock  ordinarily  does 
not  sell  at  more  than  100  cents  on  the  dollar.  The  rail- 
roads of  this  territory  are  able,  easily,  to  bond  their  prop- 
erty up  to  65%  or  70%  of  their  value.  If  you  could  se- 
cure to  these  railroad  properties  a  return  of  7%  on  their 
total  values,  the  stocks  will  be  earning  from  10%  to  15%, 
and  they  will  be  selling — every  one  of  them — from  150% 
to  200%  of  their  par  value.  You  will  be  giving  to  these 
railroads  more  than  what  the  public  says  is  reasonable. 
The  people,  who  state  this,  are  not  interested  parties 
who  are  trying  to  keep  rates  down,  or  push  them  up ;  they 
are  the  investors  of  the  nation,  at  the  market  places  of 
the  world. 


262  RETURN  ON  VALUE 

PRESENT  FAIR  VALUE. 

In  1903  the  Commission  objected  to  Present  Value,  as 
interpreted  by  the  Supreme  Court  up  to  that  time,  because 
of  its  ambiguity  and  indefiniteness.  In  1905  the  Com- 
mission quoted  from  its  former  decision,  but  qualified  its 
position,  stating  that  Present  Value  may  be  a  fair  test 
where  the  total  revenues  of  a  carrier  were  involved,  or  a 
schedule  of  rates  instead  of  a  single  rate  was  under  con- 
sideration. 

The  Commission  has  confirmed  that  doctrine  in  the 
Eastern  and  Western  Advance  Eate  Cases  of  1910,  20  I. 
C.  C.,  243,  275 ;  20  I.  C.  C,  307 ;  also  in  the  Five  Per  Cent 
Case,  31  I.  C.  C,  351. 

The  Supreme  Court  has  positively  endorsed  and  thor- 
oughly committed  itself  by  a  long  line  of  decisions  to 
Present  Fair  Value  as  being  the  correct  basis  to  adopt  in 
such  computations. 

WUlcox  v.  Consolidated  Gas  Co.,  212  U.  S.  19. 

KnoxvUle  Water  Case,  212  U.  S.  1. 

Minnesota  Rate  Case,  230  U.  S.  352, 454. 

Smyth  v.  Ames,  169  U.  S.  466. 

San  Diego  and  Town  Co.  v.  City  of  National  City, 

174  U.  S.  739. 
Steenerson  v.  Great  Northern  Ry.  Co.,  72  N.  W. 

Rep.  713,  715. 
Griffin  v.  Goldsboro  Water  Co.,  122  N.  C.  206,  211, 

30  S.  E.  319, 320, 41 L.  R.  A.  240, 242. 

San  Diego  Land  &  Toion  Co.  v.  Jasper,  189  U.  S. 
439. 

Cotting  v.  Godard,  183  U.  S.  79. 
Stanislaus  Co.  v.  San  Joaquin  &  R.  R.  C.  &  I.  Co., 
192  U.  S.  201. 

The  true  doctrine  was  announced  by  the  eminent  Jus- 
tice Harlan  in  the  celebrated  passage  from  the  case  of 
Smyth  v.Ames: 


RETURN  ON  VALUE  263 

"We  hold  that  the  basis  of  all  calculations  as  to  the 
reasonableness  of  rates  to  be  charged  by  a  corpora- 
tion maintaining  a  highway  under  legislative  sanction 
must  be  the  fair  value  of  the  property  being  used 
by  it  for  the  convenience  of  the  public."  (Ibid.  169 
U.S.) 

As  the  Commission  well  knows,  this  decision  has  be- 
come one  of  the  most  important  and  firmly  established 
precedents  in  our  system  of  law  relating  to  the  regula- 
tions of  public  service  corporations. 

In  not  one  decision,  down  to  this  date,  has  the  Supreme 
Court  ever  retracted  from  the  rule  stated  in  Smyth  v. 
Ames.  It  has  been  repeatedly  adopted  and  followed  as 
a  precedent  in  state,  federal  and  supreme  courts,  and  by 
state  railroad  and  public  service  commissions  all  over 
the  United  States.  There  is  no  rule  more  firmly  estab- 
lished than  this  one  in  American  jurisprudence. 

This  Commission  has  frequently  recommended  to  Con- 
gress that  a  valuation  of  American  railroads  should  be 
made;  and  finally  Congress  has  given  the  authority  and 
facilities  to  perform  that  task.  Realizing  the  vast  possi- 
bilities resulting  from  the  results  of  your  work,  American 
railroads  have  combined  in  one  concerted  effort  to  come- 
pletely  forestall  that  possibility,  to  make  the  national  ap- 
praisal of  American  railroads  worthless  for  any  purpose, 
except  to  see  how  high  rates  can  go.  It  would  be  as  if  a 
city  had  given  a  council  authority  to  value  a  gas  plant, 
and  just  about  when  the  city  commences  its  appraisal, 
the  council  should  declare  that  the  rates  should  be 
advanced.  rf 

Are  these  railway  companies  earning  sufficient  revenue  1 
How  can  you  answer  the  question  in  the  negative  until 
you  have  some  basis  to  work  upon  ? 

The  railway  companies  themselves  have  chosen  to  make 
that  the  issue  in  this  case.  The  decisions  of  the  Supreme 
Court  declare  what  methods  you  must  pursue,  and  what 


264  RETURN  ON  VALUE 

facts  you  must  determine,  when  that  issue  is  fairly  pre- 
sented. These  decisions  tell  you  that  the  fair  value  of  the 
properties  devoted  to  the  public  service  shall  constitute 
the  basis  for  all  your  computations. 

In  this  case  we  have  evidence  of  the  present  value  of 
large  portions  of  the  principal  railroads  in  this  territory. 
These  valuations  have  been  made  by  state  commissions, 
being  arrived  at  by  elaborate  investigations,  covering  a 
long  period  of  years.  The  methods  used  in  the  various 
states  differ  somewhat ;  but,  aside  from  the  allowance  for 
so-called  ' '  land  multiples, ' '  it  will  be  found  the  margin  of 
difference  is  not  so  large  but  what  use  can  be  made  of 
them  for  our  purpose;  for  instance,  every  state  in  the 
group  shows  that  the  present  capitalization  of  these  rail- 
roads exceeds  their  present  value. 

We  also  have  valuations  made  by  Mr.  Jurgensen,  of 
these  same  railroads,  reduced  to  a  common  method,  or 
basis. 

So  far  as  this  record  is  concerned,  these  state  valuations 
constitute  the  only  evidence  upon  which  the  Commission 
can  reach  its  conclusion  as  to  the  values  of  these  prop- 
erties, aside  from  the  testimony  of  Mr.  Jurgensen. 

These  state  valuations  were  not  offered  by  the  State 
Commissions;  they  were  offered  by  the  chief  counsel  for 
the  railroads  (tr.  13961),  Mr.  C.  C.  Wright.  They  were  of- 
fered for  the  purpose  of  offsetting  valuations  testified  to 
by  Mr.  Jurgensen.  Those  are  the  two  alternative  valua- 
tions that  we  have  for  the  railroads  of  the  Northwest. 
There  is  one  qualification  of  the  foregoing  statement.  Mr. 
Felton  of  the  Chicago,  Great  Western,  testified  that  there 
had  been  a  valuation  made  by  his  company,  the  Great 
Western  Railroad.  In  order  to  test  the  correctness  of  that 
valuation  (which  we  seriously  dispute  by  the  other  evi- 
dence offered),  we  attempted  to  find  out  the  methods  of 
arriving  at  that  valuation.  Mr.  Felton  plead  ignorance  of 
the  subject,  but  said  that  later  an  engineer  would  be  pro- 


RETURN  ON  VALUE 


265 


duced  who  could  be  cross-examined.  At  a  subsequent  date 
Mr.  Delo  was  offered  as  the  engineer  for  the  purpose 
of  cross-examination  as  to  the  valuation  of  the  Great 
Western.  It  quickly  developed  that  this  gentleman  knew 
nothing  about  the  valuation,  did  not  know  how  many  men 
were  employed  in  the  work,  or  how  long  it  took,  and  could 
only  state  that  he  simply  found  the  notes  of  the  work 
amongst  the  files  in  his  office  when  he  was  employed  by 
the  Great  Western,  which  was  after  the  valuation  had 
been  completed,    (tr.  4121.) 

SUMMARY  OF  THE  VALUATIONS  MADE  BY  STATES  OF  MINNE- 
SOTA AND  WISCONSIN. 


Present 
Value 

Capitaliza- 
tion Out- 
standing  in 
hands  of 
public   appor- 
tioned on 
basis  of  Main 
Roadway 
Owned 

Book  Value 

Minnesota    (1914)    

$277,520,366 
288,179,030 

$411,772,496 
353,934,294 

$432,310,019 

Wisconsin  (1913)   

364,997,588 

Total   

$565,699,396 

$765,706,790 

$797,307,607 

(The  foregoing  is  taken  from  Jurgensen  Exhibits  26 
and  9,  showing  Wisconsin  figures,  and  Jurgensen  Exhibits 
10  and  27,  showing  Minnesota  figures.  In  the  case  of  Wis- 
consin, capitalization  and  book  value  are  for  the  year  1914 
and  the  present  value  for  1913.  Investigation  shows  slight 
changes.  Figures  are  substantially  comparable  according 
to  Witness  Jurgensen.  We  have  used  the  Wisconsin 
present  value  just  as  found  by  the  State  Commission,  in- 
cluding what  Mr.  Jurgensen  says  is  the  multiple  on  land 
values.  For  Minnesota,  we  have  used  the  present  value 
as  found  by  Mr.  Jurgensen,  including  general 
expenditures.  We  have  taken  the  book  value  for  each 
case  as  the  carriers  give  it,  without  allowing  for  depre- 
ciation; and  we  have  only  used  interstate  railways  in- 
volved in  this  proceeding.) 


266  RETURN  ON  VALUE 

The  summary  we  have  given  above  is  the  actual  valua- 
tion of  twenty-two  interstate  railroad  properties,  having 
a  capitalization  of  over  $700,000,000,  which  has  been 
made  by  the  railroad  commissions  of  these  states.  The 
net  results  show  that  the  capitalization  outstanding  in  the 
hands  of  the  public  exceeds  the  present  value  of  the  rail- 
roads in  Wisconsin  and  Minnesota  by  $200,000,000. 

It  may  be  of  interest  to  note  that  the  average  present 
value  per  mile  was  found  to  be  $36,751  in  Minnesota,  ac- 
cording to  Mr.  Jurgensen's  valuation,  bringing  Morgan's 
valuation  down  to  date  and  correcting  it  in  harmony  with 
the  states'  valuation,  if  we  include  general  expenditures; 
and  $35,433,  excluding  general  expenditures,  under  the 
Commission 's  classification. 

This  valuation  for  Minnesota  is  that  made  by  the  pres- 
ent Chief  Engineer  for  the  State  Railroad  and  Warehouse 
Commission.  The  valuation  for  Wisconsin  is  the  one 
made  by  the  State  Railroad  Commission  of  that  state.  The 
present  value  as  found  by  the  Wisconsin  Commission,  in- 
cluding its  land  values,  just  as  found  by  the  Commission, 
amounted  to  $43,219  per  mile. 

In  the  Wisconsin  valuation,  Mr.  Jurgensen  testified 
they  had  included  a  multiple  on  land,  and  gave  in  evi- 
dence a  letter  to  be  found  in  our  abstract  of  the  record. 

Eliminating  that  factor  it  reduced  the  present  value  for 
the  Wisconsin  railroads  approximately  $18,500,000,  or 
$2,900  per  mile.  In  the  foregoing  table  we  have  given  the 
Minnesota  figures,  including  general  expenditures,  which 
is  contrary  to  the  holding  of  Mr.  Jurgensen.  Had  we 
adopted  Jurgensen's  valuation,  excluding  the  gen- 
eral expenditures,  as  he  testified  right  and  proper,  the 
total  valuation  for  Minnesota  would  have  been  reduced  by 
$10,000,000,  making  a  total  present  value  of  $267,570,853, 
or  $35,433  per  mile  of  main  roadway. 

In  the  above  table,  it  will  be  further  noted  that  not  only 
the  capitalization  exceeds  the  present  value  of  all  the 


RETURN  ON  VALUE  267 

railroads  in  Wisconsin  and  Minnesota  by  $200,000,000, 
but  the  book  value,  or  so-called  property  investment,  upon 
which  the  railroads  are  claiming  a  return  in  this  case,  also 
exceeds  the  present  value  of  the  said  railroads  in  those 
two  states,  as  found  by  the  state  authorities,  by  over 
$200,000,000.  These  figures  are  the  undisputed,  uncon- 
tradicted record  in  this  case.  It  is  thought  that  these 
figures  should  have  a  more  real  significance  than  offhand 
opinions  of  railroad  officers,  or  shippers,  as  to  the  actual 
relations  between  property  investment,  capitalization  and 
present  values  of  railroads  in  this  country. 

It  will  be  noted  that  by  the  Wisconsin  valuation,  the 
capitalization  exceeds  the  present  value  in  every  instance 
except  two.  It  will  be  further  noted  that  the  excess  capi- 
talization for  the  Wisconsin  railroads  amounts  to  $65,- 
750,000. 

The  excess  capitalization  for  Minnesota,  we  find  to  be 
$134,250,000,  according  to  Mr.  Jurgensen's  valuation. 

The  two  exhibits  showing  the  present  value  in  Wiscon- 
sin, excluding  the  so-called  land  multiple,  and  the  valua- 
tion in  Minnesota,  omitting  the  general  expenditures,  as 
described  in  the  footnote  above,  are  shown  on  the  follow- 
ing exhibits,  being  Jurgensen  Exhibits  26  and  27. 


Lt>8 


RETURN  ON  VALUE 


STATEMENT  COMPARING  WISCONSIN  VALUATION  OF  JUNE  30, 
1913,  OMITTING  MULTIPLE  ON  LAND  VALUE,  WITH  CAPI- 
TALIZATION AND  JURGENSON'S  VALUATION  OF 
JUNE  30,  1914. 


Name  of  Railway 


Capital   Stock 

&  Funded 

Debt   held   by 

public  basis 

of  main  line 

owned 


"Wisconsin 

present   value 

as  of  June 

30,  1913 


Jurgensen's 
present  value 
as  of  June  30, 
1914,  omitting 

III    General 
Expenditures 


Chicago,  Burlington  & 
Quincy  

Chicago,  Milwaukee  &  St 
Paul 

Chicago  &  North  Western. 

Omaha  

Duluth,  South  Shore  &  At- 
lantic     

Great  Northern   

Illinois  Central   

Northern  Pacific  

Minn.,  St.  Paul  &   Sault 
Ste.  Marie  

Wisconsin  Central   

Total  

Capitalization  in  excess  of 
Valuation 

Per  Mile  of  Main  Road 
way   (6,685.06)    

Capitalization  in  excess  of 
Valuation  


$     7,364,533.00 

105,227,911.00 
98,364,415.00 
32,092,546.00 

7,754,094.00 

2,140,028.00 

11,824,721.00 

9,391,788.00 

17,362,712.00 
62,411,546.00 


$  14,635,677.00 

76,539,390.00 
93,305,672.00 
28,265,149.00 

2,030,892.00 
8,285,839.00 
2,546,553.00 
4,438,981.00 

12,943,779.00 
26,682,108.00 


$353,934,294.00 


52,944.00 


$269,673,040.00 

$  84,261,254.00 
40,339.00 
12,605.00 


$  13,384,142.00 

63,709,628.00 
80,929,891.00 
25,481,140.00 

2,089,270.00 
7,287,438.00 
2,254,543.00 
3,778,347.00 

11,956,539.00 
23,011,719.00 


$233,882,657.00 

$120,051,637.00 
34,985.00 
17,959.00 


♦Figures  taken  from  Column    7  of  Jurgensen  Exhibit  23. 
♦♦Figures  taken  from  Column  26  of  Jurgensen  Exhibit  23. 


RETURN  ON  VALUE 


269 


STATEMENT   SHOWING  CAPITALIZATION  AND  VALUATION  IN 

THE  STATE  OF  MINNESOTA  AS  OP  JUNE  30,  1914. 

TAKEN  PROM  JURGENSEN  EXHIBIT  NO.  10. 


• 

Capital  Stock  & 
Funded  Debt  held 
by  public  basis  of 

main  line  owned 

Name  of  Railway 

^-^urgensen's^? 

of  Jirire  "3U,  iyi4, 

omitting  III  Gen1! 
Expenditures 

C,  B.  &  Q 

$        762,860 
32,551,598 
72,012,884 
29,800,774 
13,583,182 
17,868,377 

1,137,529 

116,516,878 

17,630,333 

41,291,051 

66,873,009 

1,744,021 

$     2,147,116 

C,  Gt  West 

11,982,472 

C.,  M.  &  St  P 

43,674,832 

C.  &  N.  W 

14,969,594 

C,  R.  I.  &  P 

6,417,916 

C,  St.  P.,  M.  &  0 

18,213,297 

D.  &  Sioux  City  (I.  C.  lessees) 
Gt.  Nor 

537,719 
76,104,025 

M.  &  St  L 

10,002,627 

M.,  St  P.  &  S.  Ste.  M 

Nor.  Pac 

31,572,811 
49,917,530 

Wise.  Cent 

2,030,914 

Total  

1411,772,496 
*          54,530 

$267,570,853 

$144,201,643 
35,433 
19,097 

Capitalization  in  excess  of 
Valuation  

Per  Mile  of  main  roadway 
(7,551.26)    

Capitalization  in  excess  of 

•Figures  taken  from  Column    7,  Jurgensen  Exhibit  10. 
••Figures  taken  from  Column  26,  Jurgensen  Exhibit  10. 


270 


RETURN  ON  VALUE 


In  addition  to  the  foregoing  we  have  of  record  the  valu- 
ations found  by  Nebraska  and  South  Dakota.  The  pres- 
ent value  of  Nebraska  railroads  amounts  to  $245,877,934, 
or  an  average  of  $40,093  per  mile  for  that  state. 

This  exhibit  was  introduced  by  Mr.  C.  C.  Wright,  gen- 
eral counsel  for  the  railroads  in  this  proceeding. 

The  present  value  per  mile  of  line,  as  found  by  the  Ne- 
braska Commission,  according  to  the  evidence  introduced 
by  Mr.  Wright  for  the  different  interstate  railroads  in 
this  case  were  as  follows: 


(Nebraska) 

Name  of  Railway 

Present  Value 
Per  Mile  of  Line 
As  of  June  30,  1911 

Chicago,  Burlington  &  Quincy 

$36,348 

Chicago  &  North  Western 

28,849 

Chicago,  Rock  Island  &  Pacific 

33,697 

Chicago,  St.  Paul,  Mpls.  &  Omaha 

27,065 

25,928 

St.  Jos.  &  Gd.  Island 

19,636 

Union  Pacific  

70,525 

RETURN  ON  VALUE  271 

In  South  Dakota,  the  present  value  of  all  the  railroads, 
as  found  by  the  South  Dakota  railroad  appraisal  as  of 
1910,  amounts  to  $84,999,424,  making  an  average  value 
per  mile  of  line  $23,345  in  that  state  of  interstate  rail- 
roads involved  in  this  proceeding.  The  values  per  mile 
of  line  of  each  of  these  railroads  in  South  Dakota,  as 
shown  by  the  exhibit,  amounted  to : 


(South  Dakota) 

Name  of  Railway 

Present  Value 

Per  Mile  of  Line 

As  of  June  30, 

1909-10 

Chicago,  Burlington  &  Quincy 

$49,819 
*21,438 

Chicago,  Milwaukee  &  St.  Paul 

24,019 

Chicago,  Rock  Island  &  Pacific 

20,761 

Chicago,  St.  Paul,  Mpls.  &  Omaha 

25,964 

Dub.  &  Sioux  City  (111.  Cent.) 

40,195 

Great  Northern   

20,465 

Minneapolis  &  St.  Louis 

19,592 
13,452 
13,260 

"Soo"  Line   

South  Dakota  Central 

♦Includes  Chicago,  Milwaukee  &  Puget  Sound  Ry. 

The  valuation  in  the  state  of  South  Dakota  by  the 
South  Dakota  Commission,  was  not  introduced  by  that 
commission,  nor  by  the  state  commissions  in  this  case. 
As  previously  stated,  the  foregoing  values  were  intro- 
duced by  Mr.  C.  C.  Wright  on  behalf  of  the  railroads. 
These  constitute  the  undisputed,  uncontradicted  record  in 
this  case,  except  as  it  has  been  stated  by  Mr.  Jurgensen 
that  the  values  are  too  high  as  stated,  and  for  the  reasons 
he  gave  while  on  the  witness  stand. 

In  addition  to  the  above,  Mr.  Jurgensen  made  a  very 
elaborate  analysis  of  the  present  value  of  the  railroads  in 
Michigan,  Wisconsin,  South  Dakota  and  Nebraska,  reduc- 
ing them  to  a  common  basis,  which  Mr.  Jurgensen  held 
is  right.  We  will  not  undertake  to  discuss  this  work.  It 
will  be  covered  by  a  separate  brief  prepared  by  the  State 
Railroad  and  Warehouse  Commission  and  the  Assistant 
Attorney  General  of  Minnesota. 


272  RETURN  ON  VALUE 

In  this  compilation,  Mr.  Jurgensen  has  used  the  basic 
figures  compiled  by  the  various  states,  combining  them 
on  a  uniform  basis.  One  of  these  valuations  by  state 
commissions  was  made  in  1900 ;  the  one  in  Michigan.  We 
are  not  especially  concerned  with  Michigan  values,  for 
they  affect  our  Western  railroads  very  slightly. 

Mr.  Jurgensen  endeavored  to  bring  the  various  state 
valuations  down  to  date  as  far  as  possible.  There  were 
some  criticisms  of  his  work  which  will  not  have  any  large 
or  substantial  effect  on  the  final  results.  Suffice  it  to  say 
that  Mr.  Jurgensen 's  valuation  of  twenty-five  railroads 
serving  these  five  states,  shows  a  total  present  value,  in- 
cluding general  expenditures,  of  $937,000,000,  or  $32,330 
per  mile.  The  present  value,  excluding  general  expendi- 
tures, amounts  to  $900,000,000,  or  an  average  of  $31,082 
per  mile. 

The  capital  stock  and  funded  debt  of  these  railroads 
apportioned  on  basis  of  main  roadway  owned,  outstand- 
ing in  the  hands  of  the  public  and  not  held  by  the  railway 
company,  amount  to  $1,459,000,000;  and  the  property 
investment,  or  book  value,  of  the  road  and  equipment  of 
these  same  companies,  as  shown  on  their  books,  aggre- 
gates $1,489,000,000. 

It  will  be  noted  that  there  is  only  about  a  two  per  cent 
variation  between  the  so-called  property  investment,  or 
book  value,  and  capitalization  outstanding ;  further,  that 
the  book  cost  exceeds  the  capitalization. 

The  capitalization  and  book  cost  of  these  properties 
exceed  the  present  value,  as  found  by  Mr.  Jurgensen,  by 
more  than  $500,000,000,  whether  you  include,  or  exclude, 
the  three  general  expenditures. 

It  has  been  suggested  by  counsel  for  the  carriers  that 
these  state  values  are  not  comparable  to  present  values  in 
those  particular  states,  because  of  the  increase  in  land 
values.    It  is  doubtful  whether  an  increase  in  land  values 


RETURN  ON  VALUE  273 

will  justify  an  advance  in  rates.  It  may  justify  increas- 
ing revenues  by  other  methods.  This  thought  was  very 
forcibly  stated  by  the  Commission  in  its  Western  Advance 
Rate  Case  of  1910.  We  will  not  repeat.  The  same 
thought  was  suggested,  but  no  final  conclusion  adopted 
by  Mr.  Commissioner  Harlan  in  the  decision  in  Texas 
Railroad  Commission  v.  Atchison,  Topeka  &  Santa  Fe, 
20  I.  C.  C.  463. 

However  that  may  be,  whether  the  railroad  is  entitled 
to  the  unearned  increment,  or  not,  as  a  justification  for 
an  advance  in  freight  rates,  the  valuation  as  of  1913  in 
Wisconsin,  and  the  valuation  brought  down  to  date  by 
the  Chief  Engineer  in  Minnesota,  constitutes  quite  con- 
clusive evidence  as  to  the  relation  between  capital  and 
value,  on  a  representative  group  of  the  strongest  roads 
in  the  Northwest,  that  have  been  notoriously  improving 
and  building  up  their  properties  in  recent  years.  This 
objection  as  to  increased  land  values  does  not  have  force 
as  to  these  computations,  because  they  are  of  recent  date. 

Mr.  Jurgensen  is  the  chief  engineer  for  the  Minnesota 
Railroad  &  Warehouse  Commission.  He  was  the  assistant 
engineer  at  the  time  of  the  trial  of  the  Minnesota  Rate 
Case,  at  which  time  Mr.  Morgan  was  the  chief  engineer. 
Mr.  Morgan,  in  making  the  valuation  of  Minnesota  rail- 
roads, in  which  he  included  the  severance  damages  occa- 
sioned by  the  purchase  of  land  for  railroad  purposes,  al- 
lowed this  item,  not  only  for  land  actually  purchased 
where  such  expenditures  were  actually  made,  but  he  cre- 
ated out  of  his  fertile  imagination,  a  multiple  which  he 
applied  to  all  the  land  the  railroads  owned,  whether 
bought  for  a  nominal  sum,  or  given  to  the  railroads,  or 
acquired,  through  condemnation;  thereby,  not  only  giv- 
ing the  railroad  valuation,  including  the  present  value  of 
its  property,  but  also  including  all  expenses  incurred  by 
the  companies  in  addition  to  that  present  value,  and  also 
a  fictitious  expense  that  is  not  a  part  of  the  present  value 


274  RETURN  ON  VALUE 

and  is  not  a  part  of  any  expenditures  the  companies  have 
ever  incurred  in  their  history.  The  allowance  for  ficti- 
tious severance  damages  of  that  character,  was  repudi- 
ated by  the  State  Railroad  &  Warehouse  Commission  of 
Minnesota ;  although  Mr.  Morgan  was  their  leading  wit- 
ness on  value.  Later  the  gentleman  resigned  from  his 
position  with  the  Minnesota  Commission  to  become  a  rail- 
way official,  and  Mr.  Jurgensen  became  his  successor. 

The  Supreme  Court  of  the  United  States  also  repudi- 
ated the  position  taken  by  Mr.  Morgan  and  by  the  rail- 
roads. There  were  various  other  important  modifications 
of  the  Morgan  valuation. 

Mr.  Jurgensen  has  had  many  years'  experience  as  a 
civil  engineer;  he  was  employed  by  the  County  Surveyor 
of  Hennepin  County  of  Minnesota  two  years,  assistant 
engineer  for  the  city  of  Minneapolis  for  one  year,  assist- 
ant engineer  of  the  Minneapolis  &  St.  Louis  Railroad  one 
summer,  employed  in  engineering  department  of  the 
Minneapolis,  St.  Paul,  Sault  Ste.  Marie  Railway  Company 
one  summer,  employed  in  the  engineering  department  of 
the  Chicago,  Great  Western  Railroad  for  eight  years,  and 
has  been  in  the  employ  of  the  Railroad  &  Warehouse  Com- 
mission of  Minnesota  for  eleven  years,    (tr.  5058,  5059.) 

In  Mr.  Jurgensen 's  consolidated  valuations,  he  has 
been  able  to  cover  a  very  substantial  portion  of  the  mile- 
age of  several  of  the  railroads.  That  is  of  much  more  sig- 
nificance than  a  small  per  cent  of  the  mileage  valued, 
because  that  might  not  be  representative  at  all  of  the  rail- 
road as  a  whole.  For  instance,  on  the  Illinois  Central  he 
only  had  4%  of  the  mileage  covered  by  the  valuation.  Mr. 
Wright  called  attention,  on  cross-examination,  to  some 
comparisons  between  so-called  preciated  present  cost,  as 
found  by  Mr.  Jurgensen,  and  the  depreciated  present  cost. 
While  on  the  stand  at  a  later  date,  the  witness  testified 
that  his  use  of  the  expression  "preciated  present  cost" 
was  practically  synonymous  with  the  expression  "repro- 


RETURN  ON  VALUE  275 

duction  new,"  while  the  " depreciated  present  cost"  was 
practically  synonymous  with  the  term  " present  value." 
An  examination  of  Mr.  Jurgensen's  exhibit  No.  13  will 
disclose  the  fact  that  in  almost  exery  instance  where  the 
present  values  were  secured  f  orm%  or  more  of  the  mile- 
age of  any  property,  the  capitalization  and  the  book  value 
of  the  said  properties  was  largely  in  excess  of  the  present 
value. 

The  foregoing  valuations,  which  we  have  been  discuss- 
ing, are  the  only  ones  that  are  a  part  of  the  record  in  this 
case. 

Mr.  Wright,  counsel  for  the  railroads,  offered  the  state 
valuations  and  used  Mr.  Jurgensen  as  his  witness.  Both 
sets  of  valuations  prove  substantially  the  same  thing. 
Serious  objection  was  made  because  of  Mr.  Jurgensen's 
appraisals  of  land.  In  that  connection,  however,  it  will 
be  noted  that  the  dates  of  the  valuations  made  by  the 
states  are  as  follows:  Wisconsin,  1913;  Nebraska,  1911; 
South  Dakota,  1910  (or  1909),  and  Minnesota,  made  by 
Jurgensen,  1914.  Whatever  may  be  the  conclusion  as  to 
Michigan,  it  can  be  fairly  stated  that  there  has  been  no 
substantial  advance  in  land  values  since  1910,  1911  and 
1913.  In  these  states,  it  is  probable  that  land  has  declined 
recently,  as  testified  to  by  the  witness.  This  would  offset, 
to  a  very  substantial  extent,  any  increase  occurring  in 
1911  or  1912. 

Apportioning  capitalization  upon  the  mileage  basis 
tends  to  spread  the  capitalization  out  equally  over  the 
system;  and  their  valuation  by  state  boundaries  concen- 
trates the  value  of  terminals  in  the  said  states.  This  must 
be  borne  in  mind  in  considering  the  significance  of  any 
total  as  of  the  amount  above.  It  will  be  noted,  however, 
that  large  terminals  of  many  of  these  railroads  are  lo- 
cated in  Nebraska,  Minnesota  and  Wisconsin.  Therefore, 
taken  as  a  whole,  the  comparison  may  be  considered  fair. 
In  those  instances  where  there  is  a  very  short  mileage  of 


276  RETURN  ON  VALUE 

main  line  that  is  valued,  or  large  terminals  are  included, 
the  values  would  exceed  the  average  for  the  system. 

In  the  two  states  of  Minnesota  and  Wisconsin  we  have 
very  large  terminals.  The  largest  terminals  on  the  sys- 
tems of  the  Great  Northern  and  Northern  Pacific,  are  lo- 
cated in  the  State  of  Minnesota.  In  the  Minnesota  case  it 
was  found  that  75%  of  the  land  values  in  Minnesota  be- 
longing to  one  of  its  principal  railroads  was  located  in 
three  cities,  Duluth,  St.  Paul  and  Minneapolis.  Those 
large  terminals  are  included  in  the  present  valuations 
given  above. 

Probably  the  most  significant  figures  to  be  remembered 
in  the  foregoing  summary  are,  first,  that  present  value  per 
mile  of  line,  as  found  by  Mr.  Jurgensen  for  all  of  the  inter- 
state railroads  in  these  four  states,  having  a  present  value 
of  $900,000,000,  averages  per  mile  of  line  $31,000. 

Second.  That  the  present  value  of  all  the  interstate 
railroads  involved  in  this  proceeding,  in  the  state  of  Min- 
nesota, as  found  by  the  Chief  Engineer  in  the  employ  of 
the  State  Eailroad  &  Warehouse  Commission,  amounted 
to  an  average  of  $35,433  per  mile. 

Third.  That  the  present  value  of  all  the  interstate  rail- 
roads involved  in  this  proceeding  in  the  state  of  Wiscon- 
sin, as  found  by  the  State  Railroad  Commission  of  that 
Commonwealth,  as  of  June  30,  1913,  and  including  the 
so-called  land  multiple,  averaged  $43,219  per  mile,  and 
excluding  the  so-called  land  multiple,  averaged  $40,339 
per  mile;  and  the  capitalization  in  the  said  state  exceeded 
the  present  value. 

The  railroads  are  industriously  trying  to  spread  the 
sentiment  throughout  the  United  States  that  the  outstand- 
ing capitalization  of  American  railroads  is  no  greater 
than  the  present  valuation  of  their  properties.  That  may 
prove  to  be  correct;  it  will  depend  upon  the  methods 
adopted  in  making  that  valuation.  So  far  as  the  west- 
ern railroads  are  concerned,  the  fallacy  of  any  such  con- 


RETURN  ON  VALUE 


277 


elusion  is  conclusively  demonstrated  by  the   foregoing 
facts  which  we  have  outlined. 

If  we  adopt  the  valuations  per  mile  of  line  found  by  Mr. 
Jurgensen  for  the  interstate  railroads  involved  in  this 
proceeding,  we  secure  the  following  returns  per  mile,  as 
indicated,  in  1914: 


FOR  YEAR  ENDED  JUNE  30,  1914. 


Net 
Operat- 
ing- In- 
come   Per 
Mile 

Return  on  basis  Jurgensen's  per  mile 
valuation  as  of  June  30,  1914 

Railroad  Co. 

All 

Stock 

% 

Two- 
thirds 
Bonds 

% 

One- 
third 
Stock 

% 

Jurgen- 
sen's 
Valua- 
tion    Per 
Mile; 
Present 
Cost   De- 
preciated 
including 
General 
Expendi- 
tures 

C,  B.  &  Q 

$2,796.00 
2,346.00 
2,738.00 
2,300.64 
3,134.88 
3,945.05 
5,261.07 
1,387.94 
1,018.75 
1,260.41 

8.0 

7.7 

8.6 

6.70 

8.32 

8.43 

9.17 

4.66 

3.32 

4.03 

4.18 
4.30 
3.98 
5.3 
4.3 
3.7 
4.1 
♦4.0 
4.3 
4.0 

15.5 

14.5 

17.8 

9.5 

16.4 

17.9 

19.3 

6.0 

2.3 

4.1 

$35,142.00 
30,483.00 

C.  &  N.  W 

C,  M.  &  St.  P 

C,  St.  P.,  M.  &  0.. 
Great  Northern  .... 

M.,  St.  P.  &  S.  S.  M. 
M.  &  St.  L 

31,844.00 
34,348.06 
37,657.69 
46,784.76 
57,357.06 
29,804.67 
30,661.39 

C.  G.  W 

31,270.07 

♦Actual  rate  not  available — assumed  this  figure  as  being  about  the 
average  for  roads  in  this  territory. 


278 


RETURN  ON  VALUE 


Adopting  the  average  value  for  each  railroad,  as  de- 
termined by  the  state  valuations,  which  have  been  made, 
we  find  the  following: 

FOR  YEAR  ENDED  JUNE  30,  1914. 


Net 
Operat- 
ing In- 
come   Per 
Mile 

Return  on  Basis  Present  Value**  as 
found  by  States   (Per  Mile) 

Railroad  Co. 

All 
Stock 

% 

Two- 
thirds 
Bonds 

% 

One- 
third 
Stock 

% 

Present 
Value 
Per    Mile 
1st    Main 
Track 
Owned 

C,  B.  &  Q 

$2,796.00 
2,346.00 
2,738.00 
2,301.00 
3,135.00 
3,945.00 
5,261.00 
1,388.00 
1,019.00 
1,260.00 

7.1 

6.7 

7.7 

6.28 

8.17 

8.28 

7.46 

4.36 

4.18 

4.03 

4.18 
4.30 
3.98 
5.3 
4.3 
3.7 
4.1 
*4.0 
4.3 
4.0 

12.9 

11.4 

15.2 

8.2 

15.9 

17.4 

14.2 

5.1 

3.9 

4.1 

$39,466.00 

C.  &  N.  W 

35,171.00 

C,  M.  &  St.  P 

C,  St.  P.,  M.  &  0... 
Great  Northern   .... 

Union  Pac 

M.,  St.  P.  &  S.  S.  M. 
M.  &  St.  L 

35,432.00 
36,643.00 
38,375.00 
47,669.00 
70,525.00 
31,825.00 
24,388.00 

C.  G.  W 

31,270.00 

♦♦Present  value  here  used  is  taken  from  original  valuations  of  the 
railroads  named  herewith  in  the  states  of  South  Dakota,  Nebraska, 
Minnesota  and  Wisconsin  for  the  years  when  the  valuations  were  made. 

♦Actual  rate  not  available — assumed  this  figure  as  being  about  the 
average  for  roads  in  this  territory. 

In  connection  with  this,  attention  is  called  to  the  fact 
that  89%  of  the  traffic  handled  by  the  Northwestern  group 
of  railroads  is  handled  by  the  C,  B.  &  Q.,  C.  &  N.  W.,  C, 
M.  &  St.  P.,  C,  St.  P.,  M.  &  O.,  Great  Nor.,  Nor.  Pac.  and 
Union  Pac.  If  you  exclude  the  last  three  from  the  North- 
western group,  then  83%  of  the  traffic  of  the  balance  of 
the  railroads  is  handled  by  the  C,  B.  &  Q.,  C.  &  N.  W., 
C,  M.  &  St.  P.  and  C,  St.  P.,  M.  &  O. 


RECAPITULATION. 


The  level  of  freight  rates  on  the  western  railroads  in- 
volved in  this  proceeding  are  already  from  20%  to  60% 
higher  than  those  on  the  railroads  in  Official  Classifica- 
tion Territory,  Central  Freight  Association  Territory,  or 
Southern  Classification  Territory. 

This  Commission  should  find  that  the  credit  of  western 
railroads,  as  a  whole,  is  as  good  or  better  than  that  of 
companies  engaged  in  any  other  line  of  business  in  the 
United  States.  The  result  of  such  a  finding  as  that  will 
simply  add  strength  and  stability  to  these  securities,  and 
will  be  of  much  more  intrinsic  worth  to  the  companies 
involved  than  an  order  finding  these  railroads  in  bad 
financial  condition. 

It  has  not  been  necessary  for  us  to  parade  glaring,  sen- 
sational incidents  of  high  finance  or  questionable  acts.  It 
is  a  business  proposition.  The  present  movement  for 
increased  freight  and  passenger  rates  involves  a  large 
sum  of  money ;  not  just  at  one  time,  but  every  year,  now 
and  in  the  future,  for  this  and  future  generations  to  pay. 

The  impression  has  been  given  that  railroads  have  not 
been  able  to  maintain  their  properties  during  recent 
years ;  that  they  have  been  compelled  to  retrench  so  se- 
verely that  the  public  has  been  injured,  as  well  as  the 
railroad  properties.  This  is  true  as  to  some  railroads; 
but  this  record  shows  that  it  is  absolutely  untrue  as  to 
western  railroads,  as  a  whole,  and  this  Commission  should 
so  find. 

As  in  all  business,  there  are  temporary  periods  of  de- 
pression when  the  railroads  as  a  whole,  including  both  the 


280  RECAPITULATION 

strong  and  the  weak  lines,  are  compelled  to  retrench  in 
their  expenses  for  a  time.  It  has  been  conclusively  proven 
that  these  western  carriers  expended  in  1914  in  main- 
taining their  properties,  $2,800  per  mile,  which  was 
greater  than  in  any  other  year  in  their  history  except 
one,  1913. 

It  has  been  proven  that  the  railroads  in  Western  Ter- 
ritory, as  a  whole,  have  actually  expended  in  maintain- 
ing their  properties,  during  the  past  five  years,  an  aver- 
age of  $50,000,000  a  year  more  than  for  any  preceding 
five-year  period  since  the  first  railroad  was  built  in  this 
Territory.  Every  railroad  witness  who  took  the  stand 
admitted,  on  cross  examination,  that  they  were  maintain- 
ing their  properties  at  a  higher  standard  during  recent 
years  than  ever  before. 

Certain  financial  journals  have  been  saying :  ' '  Give  the 
railroads  an  increase  in  freight  rates  and  they  will  help 
everybody  in  this  period  of  depression."  We  wonder  if 
it  ever  occurred  to  them  that  the  simpler  way  to  help 
these  people  would  be  to  let  them  keep  their  money,  in- 
stead of  taking  it  away  from  them.  The  method  sug- 
gested by  these  organs  of  the  money  centers,  savors 
strongly  of  notorious  monarchial  methods  of  the  past. 
The  king  needed  the  money  more  than  the  people  did,  so 
he  thought ;  therefore,  he  took  it.  There  is  a  good  strong 
sentence  that  has  been  coming  down  the  centuries,  and 
will  go  on  for  future  generations  to  consider;  it  reads 
like  this:  "Render  therefore  unto  Caesar  the  things 
which  be  Caesar  *s. ' ' 

The  railroads  are  entitled  to  a  reasonable  return.  Less 
than  that  is  unjust  to  the  railroads.  More  than  that  is 
unjust  to  the  public. 

During  the  year  1914,  as  all  people  know,  there  was  a 
world-wide  business  depression.  In  the  United  States 
the  grain  crops  of  the  preceding  fall  (being  in  the  fiscal 
year  1914)  fell  off  900,000,000  bushels. 


RECAPITULATION  281 

In  the  exhibits  offered,  it  is  shown  that  in  1913  the  net 
revenues  of  the  railroads  in  Western  Territory  as  a 
whole,  above  all  operating  expenses,  amounted  to  $420,- 
000,000,  being  the  largest,  with  only  one  exception — 1910 
— since  the  first  track  was  laid  west  of  the  Mississippi 
River. 

The  average  net  revenue  of  these  railroads,  during  the 
past  five  years  averaged  $400,000,000  per  year.  This  was 
greater  than  during  any  five-year  period,  prior  to  1913, 
in  their  whole  history. 

This  record  shows  that  the  percentage  return  of  net 
corporate  income  on  capital  stock  outstanding  in  1913, 
was  more  than  double  what  it  was  sixteen  years  ago,  and 
five  times  greater  than  it  was  twenty-five  years  ago. 

On  the  first  day  of  these  hearings,  we  announced  that 
we  expected  to  prove  these  railroads  have  been  building 
many  additions  and  betterments,  which  they  were  charg- 
ing to  operating  expenses.  In  other  words,  after  paying 
a  return  on  their  investment,  we  have  been  building  their 
properties  for  them,  and  then  are  asked  to  pay  a  return, 
not  only  on  their  investment,  but  also  on  our  investment 
— on  what  we  build  for  them.  This  is  fundamentally  un- 
sound, and  unjust. 

At  that  time,  we  did  not  realize  how  easily  those  facts 
would  be  proved.  These  claims  were  substantiated  by 
the  testimony  of  the  railroad  officials,  themselves,  before 
it  became  time  for  us  to  offer  our  evidence. 

President  Felton,  of  the  Great  Western,  frankly  ad- 
mitted on  direct  evidence,  that  practically  one-half  the 
cost  of  additions  and  betterments  could  be  charged  to 
operating  expenses,  and  that  very  large  sums  were  so 
charged  during  the  past  four  years.  President  Bush,  of 
the  Missouri  Pacific,  admitted  that  large  portions  of  the 
cost  of  rebuilding  his  road  during  recent  years  had  been 
paid  out  of  operating  revenues,  and  charged  to  expenses. 


282  RECAPITULATION 

Mr.  Wettling,  a  witness  for  all  the  railroads,  made  a  sim- 
ilar admission,  but  was  unable  to  state  how  much  of  that 
had  been  so  charged. 

This  testimony  was  supplemented  by  the  evidence  of 
Mr.  Chambers,  a  witness  on  behalf  of  the  State  Commis- 
sions, who,  from  a  personal  examination  of  the  books  of 
the  carriers,  demonstrated  that  over  $13,000,000  had  been 
expended  in  raising  the  standard  of  the  property  of  one 
company.  This  witness  did  not  take  into  account  large 
sums  expended  for  labor  in  connection  with  additions  and 
betterments,  which  can  be  charged  to  operating  expenses ; 
he  did  not  take  into  account  rails,  ties,  ballast,  tunnels  and 
maintenance  of  roadway  and  track,  all  of  which  would 
have  added  large  sums  to  the  amount  he  demonstrated 
had  been  expended  in  the  manner  described.  The  mag- 
nitude of  the  total  sums  involved  may  be  grasped  when 
it  is  noted  that  Mr.  Wettling 's  exhibit  shows  that  over 
$700,000,000  have  been  expended  in  additions  and  better- 
ments by  these  western  railroads  during  the  past  seven 
years.  It  is  safe  to  say  that  the  cost  of  additions  and 
betterments,  amounting  to  several  hundred  million  dol- 
lars, has  been  charged  to  operating  expenses  by  these 
western  railroads  during  recent  years.  So  long  as  this 
practice  is  permitted  to  continue,  it  is  going  to  be  ex- 
ceedingly difficult  to  determine  just  what  are  the  net 
earnings  of  our  railroads. 

When  prosperity  is  at  its  very  highest,  the  railroads 
can  show  the  lowest  net  earnings,  by  simply  building  a 
larger  amount  of  improvements  and  extensions,  and 
charging  large  portions  of  this  to  operating  expenses, 
thereby  automatically  reducing  their  net  income.  We 
have  been  passing  through  a  period  of  new  construction 
of  that  character,  for  which  proper  allowance  must  be 
made. 

We  are  perfectly  willing  to  pay  the  people  these  gen- 
tlemen represent,  an  adequate  return  for  their  invest- 


RECAPITULATION  283 

ment,  such  adequate  return  to  include  a  reasonable  sur- 
plus for  tiding  them  over  lean  years;  but  we  are  abso- 
lutely unwilling  to  build  their  properties  for  them  and 
then  pay  a  return  on  what  we  build.  There  is  no  justice 
in  that.  The  American  people  will  not  permanently  sub- 
mit to  any  arbitrary  action  which  works  a  substantial 
wrong  on  the  public. 

The  use  of  the  so-called  property  investment,  which  is 
simply  a  book  value,  and  which  includes  the  value  of  that 
kind  of  property,  built  out  of  surplus,  as  a  justification 
for  an  advance  in  freight  rates,  is  fundamentally  wrong. 
Such  a  policy  has  been  condemned,  in  the  past,  by  two 
unanimous  decisions  of  this  Commission.  Such  a  policy 
has  been  repudiated  by  some  of  the  leading  railroad  of- 
ficials of  the  country,  while  on  the  witness  stand  under 
oath,  before  this  tribunal. 

If  there  were  any  emergency  or  crisis  in  the  railroad 
business,  it  might  demand  a  temporary  advance  in  rates 
until  the  Commission  has  completed  its  appraisal  of 
American  railroads.  These  western  railroads  have  not 
even  attempted  to  claim  any  emergency  or  crisis  in  their 
business,  as  did  the  eastern  carriers.  They  acted  wisely 
and  fairly  in  this,  for  there  is  no  such  emergency.  They 
have  been  steadily  improving  financially,  and  physically, 
during  recent  years. 

The  attractiveness  of  stock  is  purely  a  relative  matter. 
There  is  no  answer  to  the  argument  that  the  larger  sur- 
plus, or  the  larger  dividend,  will  make  a  more  attractive 
stock;  and,  in  turn,  there  is  no  limit  to  that  argument. 
The  practical  question  comes  in  here :  Are  these  securities 
attractive,  compared  with  those  of  companies  in  other 
pursuits  ?  What  does  the  ordinary  business  yield  ?  These 
are  the  important  questions.  If  you  find,  in  fact,  that 
these  railroad  companies  have  been  able  to  maintain  their 
properties  as  they  ought  to  be  maintained,  and  that  rail- 
way credit,  and  railway  securities,  are  as  sound  and  at- 


284  RECAPITULATION 

tractive  as  those  of  other  public  service  and  industrial 
companies,  then  there  is  no  reason  for  still  larger  returns 
in  the  shape  of  dividends  or  surplus. 

Attention  has  been  called  to  the  fact  that  4%  bonds  can 
no  longer  be  marketed  at  par,  as  they  were  years  ago. 
It  comes  with  poor  grace  to  charge  the  public  6%,  and  then 
complain  because  you  cannot  get  your  money  at  4%.  An 
advance  in  freight  rates  will  not  make  4%  bonds  sell 
at  par. 

Professor  Roscoe  Pound,  of  Harvard,  tells  the  following 
instance,  that  is  applicable  to  this  argument :  A  sarcastic 
conveyancer,  during  the  fever  for  legislative  reform  in 
England,  proposed  this  law:  "Be  it  enacted  that  during 
the  month  of  April  of  each  year  the  King 's  loyal  subjects 
shall  be  at  liberty  to,  and  are  hereby  enabled  to  go  forth 
without  umbrellas  upon  any  and  all  public  streets,  roads 
and  highways,  without  getting  wet. ' ' 

Whether  rates  are  advanced  or  not,  whether  the  Com- 
mission or  Congress  attempts  to  legislate  that  prices  on 
bonds  shall  not  decline,  will  have  no  more  practical  effect 
on  the  bond  prices  than  the  law  proposed  by  the  English 
conveyancer  would  have  had  on  the  weather  conditions 
during  the  month  of  April.  The  market  prices  on  4  or 
41/2%  bonds  are  not  peculiar  to  the  railroad  industry.  The 
general  financial  situation  and  extraordinary  production 
of  gold,  are  the  controlling  factors  in  that  situation,  and 
this  Commission,  as  we  said  in  1910,  cannot  affect  that 
situation. 

There  is  nothing  to  indicate  that  railway  credit,  or 
railway  profits,  differ  materially  from  the  financial  situ- 
ation of  other  industries  generally,  except  that  the  condi- 
tion of  these  railroads,  as  a  whole,  has  been  proved  to  be 
superior.  There  are  ups  and  downs  in  all  business.  The 
railroads  must  take  the  bitter,  with  the  sweet.  We  find 
the  general  trend  of  their  net  revenues  and  of  their  credit, 
over  a  series  of  years,  to  be  distinctly  upward. 


RECAPITULATION  285 

There  has  been  a  marvelous  development  and  growth 
in  the  property,  and  revenue,  of  Western  railroads  during 
the  past  five  years,  surpassing  all  prior  years,  and  sur- 
passing all  other  countries. 

More  than  one-third  of  the  railroad  mileage  of  the 
world  has  been  constructed  by  American  railway  com- 
panies with  private  capital.  Certainly  these  securities 
must  be  attractive  to  investors. 

The  Northwestern  group  of  railroads  has  increased  its 
property  investment,  during  the  past  five  years, 
more  than  $700,000,000.  The  Northwestern  and  South- 
western groups  of  railroads,  named  in  the  Commission's 
suspension  order  in  this  case,  have,  together,  increased 
their  property  during  the  past  five  years  more  than  one 
billion  dollars. 

The  Western  railroads  as  a  whole  are  able  to  pay  their 
operating  expenses  including  taxes,  and  to  properly  main- 
tain their  properties.  There  is  no  claim  of  any  need  for 
money  for  those  purposes.  These  carriers  are  not  asking 
for  more  money  to  meet  the  interest  on  their  outstanding 
indebtedness.  While  a  few  have  failed,  the  same  is  true 
in  all  lines  of  industry.  As  a  whole,  they  are  able  to  meet 
their  obligations.  While  there  is  a  slight  advance  in  in- 
terest charges  on  new  money  over  fifteen  years  ago,  old 
bonds  have  been,  and  are  being,  retired ;  so  that  the  aver- 
age interest  payment  on  all  outstanding  indebtedness  is 
less  today,  than  in  former  years. 

The  carriers  are  not  demanding  more  money  for  the 
purpose  of  paying  dividends.  While  the  average  interest 
rate  has  declined,  the  average  dividend  rate  has  increased. 
The  dividends  paid  by  these  Western  railroads  last  year 
amounted  to  $140,967,725.  The  rate  of  dividends  paid  by 
the  Western  railroads,  including  both  the  Northwestern 
and  Southwestern  groups,  last  year,  was  73%  greater 
than  in  1900,  and  121%  greater  than  in  1890.    The  average 


286  RECAPITULATION 

dividend  rate  during  recent  years  has  been  greater  than 
ever  before  in  the  history  of  these  companies. 

The  total  annual  cash  return  to  the  owners  of  these 
railroads,  in  interest  and  dividends,  during  the  past  five 
years,  has  been  in  amount,  and  in  rate,  greater  than  dur- 
ing any  other  five-year  period  in  their  history,  as  far  back 
as  official  records  are  available. 

The  carriers  ask  for  more  money  that  they  may  have  a 
surplus  with  which  they  can  build  additions  and  improve- 
ments, needed  and  demanded  by  the  public. 

The  total  accumulated  surplus  earnings  of  those  West- 
ern railroads  named  in  the  suspension  order  of  the  Com- 
mission, on  the  30th  day  of  June  last  year,  amounted  to 
$457,800,000,  a  part  of  which  was  in  property  that  has 
been  acquired,  and  is  in  railroad  service;  but  that  is  not 
true  of  all  of  it,  for  they  had  cash  on  hand  and  invest- 
ments in  outside  securities.  They  paid  dividends  last 
year,  amounting  to  $140,900,000.  They  had  cash  on  hand 
amounting  to  $125,000,000.  The  book  value  of  securities 
held  in  their  treasuries,  laid  aside  for  future  use,  and 
unpledged,  aggregated  $190,000,000. 

We  submit  that  the  legitimate  requirements  of  a  sur- 
plus are  here  provided  for.  If  they  desire  to  build  per- 
manent revenue  producing  improvements,  they  must  do 
it  with  their  own  money;  they  must  not  expect  us  to  do  it 
for  them. 

It  has  been  proved  that  the  depression  in  the  past  year 
was  not  due  to  freight  or  passenger  rates,  and  was  not 
peculiar  to  the  railroad  industry,  but  applied  to  business 
generally  throughout  the  world. 

It  has  been  proven,  incontestably,  that  the  credit  of 
these  western  railway  companies  is  better  than  that  of 
representative  companies  in  any  other  line  of  business  in 
the  United  States. 

It  has  been  proven,  incontestably,  that  these  companies 


RECAPITULATION  287 

have  been  able  to  maintain  their  properties,  during  recent 
years,  at  a  higher  standard  than  ever  before  in  their  his- 
tory; and  they  have  also  set  aside  large  sums  of  money  out 
of  earnings,  for  betterments,  improvements  and  out- 
side investments. 

Tersely  stated,  the  issues  in  this  case  center  around 
the  one  question :  Who  shall  pay  for  additions  and  better- 
ments to  railroad  property?  The  public  interests  demand 
better  service,  safer  transportation,  and  improved  facili- 
ties; but  it  also  demands  that  the  railroads  themselves 
shall  build  these  improvements,  and  the  public  will  then 
pay  a  reasonable  return  on  their  value.  We  want  these 
betterments;  but  justice  demands  that  we  shall  not  pay 
for  their  construction,  and  then  pay  an  annual  return  to 
the  railroads  on  what  we  build. 

We  here  adopt  the  language  of  a  tribunal  that  ranks 
high  in  the  American  scheme  of  government : 

These  roads  need  more  money,  it  is  said,  but  they 
fail  to  show  that  their  credit  is  not  good,  that  they 
have  been  unable  to  secure  money  at  current  rates,  or 
that  they  cannot  make  needed  improvements  and  ex- 
tensions because  of  a  lack  of  faith  in  their  solvency 
and  the  stability  of  their  securities.  To  increase  the 
rate  of  addition  to  surplus  for  the  reasons  which  the 
carriers  have  advanced  would  seem  to  be  a  work  of 
supererogation. 

Respectfully  submitted, 

MINNESOTA  RAILROAD  &  WAREHOUSE  COMMISSION, 

By  IRA  B.  MILLS, 

CHAS.  E.  ELMQUIST, 
O.  P.  B.  JACOBSON, 

Commissioners. 
A.  J.  EDGERTON, 
Assistant  Attorney-General. 

NEBRASKA  STATE  RAILWAY  COMMISSION, 
By  H.  T.  CLARKE,  JR., 
THOMAS  L.  HALL, 
H.  G.  TAYLOR, 

Commissioners. 
WILLIS  E.  REED, 

Attorney-General. 


KANSAS  PUBLIC  UTILITIES  COMMISSION, 
By  JOSEPH  L.  BRISTOW, 
C.  P.  FOLEY, 
JOHN  M.  KINKEL, 

Commissioners. 

A.  E.  HELM, 

Commerce  Counsel. 

SOUTH  DAKOTA  RAILROAD  COMMISSIONERS, 
By  J.  J.  MURPHY, 

P.  W.  DOUGHERTY, 
W.  G.  SMITH, 

Commissioners. 
OLIVER  E.  SWEET, 

Counsel. 

NORTH  DAKOTA  BOARD  OF  RAILROAD  COMMISSIONERS 

By  W.  H.  STUTSMAN, 
O.  P.  N.  ANDERSON, 
W.  H.  MANN, 

Commissioners. 

IOWA  BOARD  OF  RAILROAD  COMMISSIONERS, 
By  CLIFFORD  THORNE, 
J.  H.  WILSON 
JNO.  A.  GUIHER, 

Commissioners. 
J.  H.  HENDERSON, 

Commerce  Counsel. 

OKLAHOMA  CORPORATION  COMMISSION, 
By  J.  E.  LOVE, 

GEO.  A.  HENSHAW, 
W.  D.  HUMPHREY, 

Commissioners. 

RAILROAD  COMMISSION  OF  LOUISIANA, 
By  SHELBY  TAYLOR, 

B.  A.  BRIDGES, 
JOHN  T.  MICHEL, 

Commissioners. 
W.  M.  BARROW, 
Assistant  Attorney-General. 

ARIZONA  CORPORATION  COMMISSION, 
By  F.  A.  JONES, 
W.  P.  GEARY, 
A.  W.  COLE, 

Commissioners. 

RAILROAD  COMMISSION  OF  ARKANSAS, 
By  J.  SAM  ROWLAND, 

wm.  f.  Mcknight, 
thos.  e.  wood, 

Commissioners. 


PUBLIC  UTILITIES  COMMISSION, 
OP  THE  STATE  OP  COLORADO, 
By  S.  S.  KENDALL, 
GEO.  T.  BRADLEY, 
M.  H.  AYLESWORTH, 

Commissioners. 

PUBLIC  UTILITIES  COMMISSION  OP  IDAHO, 
By  A.  P.  RAMSTEDT, 
JOHN  W.  GRAHAM, 
A.  L.  PREEHAFER, 

Commissioners. 

RAILROAD  COMMISSION  OP  MONTANA, 
By  J.  H.  HALL, 
E.  A.  MORLEY, 

j.  e.  Mccormick, 

Commissioners. 

RAILROAD  COMMISSION  OP  NEVADA, 
By  H.  P.  BARTINE, 

J.  F.  SHAUGHNESSY, 
W.  H.  SIMMONS, 

Commissioners. 

STATE  CORPORATION  COMMISSION  OF  NEW  MEXICO, 

By  MATTHEW  S.  GROVES, 
HUGH  H.  WILLIAMS, 
OSCAR  L.  OWEN, 

Commissioners. 

TRAFFIC  SERVICE  BUREAU  OF  UTAH, 
By  ROSS  W.  BEASON. 

Commissioner. 


Dated  at  Des  Moines,  Iowa,  June  9,  1915. 


